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Pre-Probate

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Pre-Probate-When Death Strikes

10-2     Location of Death

A survivor and his or her family will react differently-and will need to react differently-depending on where the death of the loved one occurs. Absent an acci­ dent or murder, three basic options exist for the location of the death: at home, at a nursing home, or at a hospital.zzzz

10-2 :1 Home Death

Today’s widespread availability of hospice care enables many families to experience the death of a loved one at home. Hospice attempts to provide pain management and comfort care, without either delaying or promoting death.9

10-2 :1.1 Necessary Legal Documents

Families considering having their loved one die at home should arm themselves (on their loved one’s behalf) with at least the following documents:

  1. an Out-of-Hospital Do-Not-Resuscitate (DNR) order, to be used in the home to prevent emergency medical services (EMS) personnel from trying to resusci­ tate the deceased;10
  2. a Directive to Physicians and Family or Surrogates (also known as a Living Will), which will inform the attending physician and medical staff about the person’s wishes regarding life-sustaining treatment if he or she is in a terminal condition and unable to communicate his or her wishes regarding treatment;11
  3. a Medical Power of Attorney, which would, if necessary, allow the dying per­ son’s agent to make health care decisions on his or her behalf if the person is incompetent:;12 and
  4. an Appointment of Agent to Control Disposition of Remains, which spells out the dying person’s preference regarding burial and cremation, the type of funeral the person wants, and even the contents of the obituary.13

As we explained earlier in this text, the dying person would have executed these instruments while he or she still possessed mental capacity. He or she would have informed al least one family member about the location of these instruments.

10-3:1.2 Informing the Authorities

When a loved one dies at home, the survivor has several options on who to contact. Generally, these include the following:

  1. The hospice: It the decedent had been ill for some time, it is quite possible that his or her survivors would have arranged for hospice care. If the hos­ pice nurse is present at the home at the time the decedent dies, the death is deemed “attended,” just as it would be if the decedent had been under the care of a physician.14 The presence of hospice and the designation of the death as “attended” should be sufficient to spare the survivor the rigors of calling the police or EMS or having the Justice of the Peace for the precinct conduct an inquest into the death.15

If, however, the hospice nurse is not present at the time the patient dies, the survivor should call the hospice to report the death, and then follow their advice on what to do next. It may well be that the death would be labeled “unat­ tended,” needing investjgation by the police, the medical examiner, and maybe the conducting of an inquest.16

  • The police: If the death was natural and expected, the police will complete a report form and contact the funeral home. However, if the death occurred under unusual circumstances, the police will investigate the death. A death investigator may investigate the scene of death and interview witnesses and medical caregivers.17 At this point, a Justice of the Peace for the precinct may conduct an inquest into the person’s death. If, however, the county is served by a medical examiner, the death investigator may call in the local medical examiner who may transrer the decedent’s remains to the medical examin­ er’s office.”‘ TI1e next step might be for the medical examiner to conduct an autopsy. Thereafter, the medical examiner will conduct an inquest into the decedent’s death.19
  • EMS: Regardless of how well a caregiver has prepared for the pending death of someone, the actual death often elicits a call for EMS personnel. It is at this point that the survivor should be armed with the Out-of•Hospital DNR order and the Directive to Physicians, ready to assert the rights of the now-deceased

person who executed these instruments. EMS often transports the person’s remains to the hospital, where a physician examines the body and certifies the cause of death.

  1. TI,e fimerol home: If death is expected and the decedent and family had made pre.arrangements (such as the purchase of a funeral/burial plan) with a funeral home, the survivor may simply call the funeral home. The funeral director wiH arrange for the body”s transportation, a final examination, and certification of the death. Uthe decedent and his or her farnily had not made any pre-arrangements with a funeral home, the survivor may, at this point, do some comparison shopping to select a funeral home that fits his or her budget. 111e survivor should not rush into such an important decision.

10-3:2 Nursing Home Death

If a nursing home resident’s death is sudden, it may occur at the nursing home. Other­ wise, as the resident’s condition slowly deteriorates, the nursing home may transfer the resident to a hospital prior to death.

Generally, nursing homes do not have a place to store a resident’s remains. Neither does the home want to keep the dead body in the room for an extended period, espe­ cially if it is a semi-private room. Accordingly, if the decedent and his or her family had made pre.arrangements with a funeral home, the nursing home will call the funeral home to inform the funeraJ director about the death, whereupon the funeral home will transfer the remains.         •

If, however, no pre-arrangements are in place with a funeral home. the nursing home may pressure the survivor to contact a funeral home quickly to come transfer the remains. Yet, the survivor should not be rushed into a decision! What he or she may do in this situation is determine whether the body could be moved to the coro­ ner’s office for temporary storage while the survivor selects a funeral home.

10-3:3 Hospital Death

Death in the hospital is often referred to as an ..attended death.” In such deaths, the circumstances are known, the causes well documented. In most cases, the attending physician will certify the death and release the body to the funeral home directly from the hospital’s morgue.

H, however, a person dies in a hospital and the attending physician is unable to certify the cause of death, the hospital’s manager is required to report the death to the local Justice of the Peace.WTuereafter, the Justice of the Peace (or medical examiner in larger counties) will conduct an inquest into the decedent’s death.21

  1. The Autopsy

An autopsy is not required in every death. Generally, autopsies are performed under two sets of circumstances: (1) the decedent’s surviving family members may ask for an autopsy (referred to in this text as an “elective autopsy'”)2’l or (2) the Jaw requires that a Justice of the Peace or medical examiner (in large counties or combinations of counties served by a medical examiner) order an autopsy to determine the cause and manner of death in cases of accident. homicide, suicide, and undetermined death.Zl If the decedent was an inmate within the state prison system, under certain circum­ stances. the Texas Department of Criminal Justice can also order that an autopsy be performed.24 For purposes of this text. we shall refer to the autopsies provided for by Texas law as “legally required” autopsies.

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10-4    Organ Donation Issues

Once the decedent’s remains have been transferred to the funeral home, medical examiner’s office, or anywhere other than the scene of death, the survivor may wish to turn his or her attention to the issue of anatomical gifts.

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l 0-6  Funeral Issues

Funeral issues are some of the most worrisome issues a survivor has to deal with tollowing the death of a loved one.

10-4  :1 Funeral Costs

As an initial matter, the issue of cost looms large for the survivor. According to the National Fut1eral Directors Association, the average cost of a traditional funeral in 2019 was $7,640.52 Jf the burial required the purchase of a vault, the average cost jumped to• $9,135-.53 For people who opt for cremation, the median cost in 2019 was

$5,150. These prices do not include cemetery, monument or marker costs, or miscel­ laneous cash-advance charges, such as for flowers or an obituary.55

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10-6:2 Government Assistance

The federal government provides some assistance toward funeral and burial costs. These come in the form of either Social Security or Veterans Administration (VA) benefits.

1-6      :3 Cremation Issues

In some circles. a debate rages about the virtues of cremation compared with tradi­ tional burial. For a variety of reasons, many people today are turning to cremation. Earlier in this chapter, we discovered that cremal.ion costs less than burial. It is no wonder, then, that several cremation societi.es have sprung up all over the country. Indeed. some have sprung up in Texas where the average cost of a cremation is under

$1,000, much less than the average $10,000 it costs for a traditional burial.01

 10-6:4 Death Certificates

The death certificate is a legal document that provides proof that a death has occurrecF3 TI1e certificate includes the date of death, the decedent’s Social Security number, and the name of the place and the specific number of the plot, crypt. lawn crypt. or niche in which the decedent’s remains will be interred or, if the remains will not be interred. the place and manner of other disposition.H The certificate also includes the cause of death, as certified by the attending physician75 or, if the death was not attended, by the person conducting the inquest into the decedent’s death.76 The medical certification part of the certificate can be amended following the conclu­ sion of an autopsy and receipt of the autopsy results.77

l 0-6:4.1 Obtaining Copies of the Death Certificate

The process of obtaining the death certificate is not too difficult for the surviving spouse. The surviving spouse answers some questions at the funeral home regard­ ing the decedent’s date of birth. parentage, and work history. The funeral director forwards that information to the hospital or physician who will be certifying the death. Once the doctor enters the cause of death and signs the certificates. Texas Department of State Health Services, Vital Statistics Unit, issues death certificates. The survivor pays for the certificates as part of the funeral costs paid to the funeral home. Indeed, in most cases, it is the duty of the funeral homed irector-as the person responsible for interment of the body or disposition or it if it is not being interred-to file the death certificate.78

Beyond the original copies issued to the survivor, the Vital Statistics Unit issues certified copies of death certificates to qualified parties for a fee.79 Qualified parties are limited to immediate family members (i.e., the decedent’s surviving spouse, children, siblings, parents, or grandparents) or people with a special relationship with the decedent (such as the executor of the decedent’s estate) who must provide legal documentation proving the special relationship.Pl’

10-6:4.2 Uses of the Death Certificate

111e death certificate is an important legal document that enables the decedent’s family members to close up the decedent’s business matters here on Earth. As an initial matter, receipt of the death certificate is necessary for the burial or other dispo­ sition of the decedent’s remains.81 Next, when the named executor of the decedent’s estate app1ies for probate of the decedent’s Last Will and Testament and of his or her estate, the named executor must provide proof to the court that the decedent has died.82 The decedent’s death certificate constitutes the best form of proof that the decedent has indeed died. Finally, the decedent’s survivors will also need copies of his or her death certificate to deliver to the bank, insurance company, stock broker, and other people with who they must now do business on the decedent’s behalf.

10-7    Administrative Issues

At the same time that he or she is addressing funeral issues, the survivor must also address important administrative issues. The proper approach to these issues will go a long way lo ensuring the smooth transfer of the decedent’s estate to his or her beneficiaries or heirs.

  1. : 1 Gather the Documents

TI1e survivor must, as soon as possible after the decedent’s death, gather the dece-­ dent’s original legal documents, along with any other vital information. Among other things, the documents may include (to the extent they exist):

  • Last Will and Testament;
  • codicil to any Last Will and Testament;
  • Body Bequeathal Contract:
  • pre-need funeral contract and burial instructions;
  • Cremation Society membership;
  • names, addresses, and telephone numbers of family members;
  • Social Security number;
  • pension documents for any survivorship payments;
  • memoranda regarding the distribution of personal effects;
  • Living Trust Agreement;
  • amendments to living trusts;
  • prenuptial agreement;
  • postnuptial partition agreement;
  • conversions to community property under Texas Family Code§ 4.102;
  • Community Property Survivorship Agreement;
  • Family Limited Partnership Agreement;
  • pension survivorship rights:
  • life insurance policies;
  • automobile title(s);
  • deeds to real property;
  • residential leases:
  • mortgages/liens against real property;
  • notes receivable and payable;
  • judgments of record;
  • active litigation files;
  • buy-sell agreements;
  • partnership agreements;
  • password lists for computer access;
  • previous year’s federal income tax returns (IRS Form 1040. Form 1040A and necessary schedules) and identity of the decedent’s tax preparer;
  • stocks and bonds:
  • list of bank deposits: and
  • decedent’s driver’s license.

10-7:2 Secure the Computer

The decedent would most likely have left a computer at home. However, the sur­ viving spouse may not be familiar with either the operation of the computer or the information stored on it Yet, the computer might contain financial data, family rec­ ords, the identity of heirs, or a computer address book with phone numbers and e-mail information. If the surviving spouse is not computer literate, he or she should retain the services (or help) of someone who can assist in the retrieval of this infor­ mation. ff this information reveals that the decedent had online subscription agree­ ments, the surviving spouse should dose them out. The surviving spouse would also have to decide whether he or she wants lo continue the decedent’s Internet access agreement.

At the very least, the surviving spouse should have the computer hard drive “wiped” dean by a computer technician before the spouse disposes of it.

10-7:3 Notifications

FolJowing the death of a loved one, the survivor faces the often unpleasant task of notifying various people and entities. Some of those notifications have legal implications.

10-7:3.1 Family Members

It is very important that the survivor notifies the decedent’s family members of his or her death. Some-if not all-of these family members may be beneficiaries in the decedent’s Last Will and Testament. Others just need to know, if for anything e]se. to preserve family harmony.

10-7:3.2  Obituary

The funera1 home normally asks whether the survivor desires an obituary. Obituaries are voluntary, yet can be quite expensive. \\’hether or not the survivor opts to have an obituary, and how long he or she decides it should be, is a matter of personal prefer­ ence. We simply note that the obituary has no legal significance and is not an official notice of the decedent’s death.

10-7:3.3 Power of Attorney

If someone other than the surviving spouse holds a durable power of attorney for the decedent, the surviving spouse shou1d inform that person about the death imme­ diately. After all, the agent’s authority under a durable power of attorney terminates upon the principal’s death.b.1 However, acts performed by the agent after the princi­ paJ’s death are valid if the agent was acting in good faith and was not aware of the principal’s death.61 It is important, therefore, that the agent be informed about the principal’s death as soon as possib1e lest he or she does something that contradicts the surviving spouse’s wishes.

10-7  :3.4 Clergy

After notifying the family. to the extent the decedent was religious, the survivor shoul call the loca1 religious leader of the decedent’s faith or house of worship. The survivor should seek to honor religious traditions important to the decedent. The survivor will typically find that the clergy may be deeply involved with the funeral, offering suggestions to honor traditional religious practices and meeting with family members to prepare a euJogy.

10-7  :3.5 Social Security

17,e Social Security Administration recommends that, as soon as possible after the death of someone who was receiving Social Security benefits, a family member shou1d:

  1. Notify Social Security of the beneficiary’s death. In most cases. the funeral director will report the person’s death to the Social Security Administration. To facilitate that, a survivor should give the funeral director the deceased’s Social Security number so he or she can report the death.t’-5 However, tJ1e survivor should still call the Social Security Administration’s toll-free number 0·800-772- 1213) soon thereafter to ensure the survivor’s benefits are properly processed.
  • If the decedent had been receiving monthly Social Security benefits by direct deposits. the survivor should notify the bank or other financial institution of the beneficiary’s death. l11e survivor should also request that any funds received for the decedent for tile month of death and later be returned to the Social Security Administration.86
  • If the decedent received benefits by check, the survivor should not cash any checks received for the month the decedent died or thereafter. Instead,. he or she should return the checks to the Social Security Administration as soon as possible.87

If the surviving spouse is receiving Social Security benefits on the decedent’s earn­ ings record. upon receiving notification of the decedent’s death, the Social Security Administration will change the payments to survivor’s benefits.88

If the survivor is already receiving Social Security benefits based on his or her own earnings record, he or she should apply for survivors benefits.119 This can be done during the survivor’s initial contact with the Social Security Administration. The survivor wiJI receive only one check, but it will be based on the bigger of the two earnings records.90

A surviving spouse receives full benefits at age 65 or older, or reduced benefits as early as age 60.91 A disabled widow or widower can receive benefits at ages 50-60.92 The survivor’s benefit may be reduced if he or she also receives a pension from a job where Social Security taxes were not withheld.93

10-7:3. 7 Other Pension Administrators

The surviving spouse should have information on other pensions the decedent received. lf that is not readily available. the attorney should ask to see the decedent’s copy of the previous year·s federal income tax return. Attached thereto should be one or more IRS Form 1099 that would identify the payor and give other account information.

10-7:3.8 Life Insurance Companies

lf the decedent owned life insurance policies, the survivor must locate each policy. The survivor should then contact the issuer to begin the paperwork to file a claim. The insurance company will mail the claim forms to the survivor. The survivor will complete the claim form and return it to the issuer, along with a copy of the decedent’s death certificate.

Texas law imposes certain deadlines on the insurance company as regards the receipt, investigation. and paying of the claim. The insurance company must acknowl­ edge the claim and start investigating it within 15 days of receiving written notice of the claim.101 As part ofits investigation, the company may request additional items and statements it reasonably believes it would need to make a determination reference the claim.1ccOnce the company has received all necessary information, it has another 15 days to notify the claimant in writing whether it will accept or reject the claim.103 Uthe company cannot meet these deadlines, it must inform the claimant of this inability, whereupon the company will have an additional 45 days to accept or reject the claim.101 If the company then rejects the claim, it must give the claimant written notice as to the reason why.105 If the company accepts the claim and agrees to pay, it must send pay­ ment within 5 business days of its informing the claimant that it would pay the claim.1<:..; All things considered and barring any further delays, the insurance company must pay the claim no later than 60 days after receiving the claim, proof of the beneficiary’s death, and documents confirming the rights of the claimants to the proceeds. w;

10-7:3.9 Tax Appraisal District

lf the survivor is the decedent’s spouse, he or she shou Id contact the local tax appraisal district as soon as possible after the decedent’s death.

lf a homeowner is receiving the 65-plus exemption108 and dies leaving a surviving spouse under age 65, the surviving spouse can continue the homestead exemption so long as he or she is 55 or older at the time of the decedent’s death, and (1) lives in and (2) owns the home and (3) applies to continue the tax exemption.H11 Appendix 18 contains an Application for Residence Homestead Exemption form.

10-8         Assets and Accounts that Pass Outside Probate

Many assets pass to survivors without going through the probate process. These assets range from items as simple as hank accounts to complex creations like the revocable living trust. In this section, we discuss some of those assets and look at how survivors could ensure that they receive the assets after the decedent’s death.

10-8:1 Bank Accounts

In Chapter 5, we discussed bank accounts and their function as resource management tools for the elderly. We return to them now to focus on hank accounts the proceeds of which can be transferred to a decedent’s survivor without going through the probate process. The survivor should determine whether he or she is a party on any of these types of accounts and should take appropriate action to have accounts transferred to his or her name where applicable. If the survivor is not sure about his or her owner­ ship status reference an account, he or she should ask the financial institution for a copy of the signature card. The card is actually a contract that will show whether the

survivor is entitled to become owner of the account now lhat the decedent has died. rt

the survivor is thus entitled, he or she should give a death certificate to the financial institution, whereupon it would release the funds to the survivor.

10-8  :1.1 Single Party Account With Payable on Death (POD) Beneficiary

As we discovered in Chapter 5, an elderly person who owns this type of account is, while still alive, the only person with authority to access it. Upon the eider’s death. however, the person or persons named on the account card as the POD beneficiary or beneficiaries become the owner(s) of the account.1IOThe POD arrangement super­ sedes anything the elder may say about the account in his or her Last Will and Tes­ tament. The account proceeds pass outside of probate, and are not included in the decedent’s estate.111

10-8 :1.2 Multiple Party Account Without Right of Survivorship

This type of account is commonly referred to as a ”joint account.” During the lifetime of all parties to the account, the account belongs to them all to their respective netcon­ tributfons to it-unless clear and convincing evidence exists that they intended other­ wise.112 In short., each person is entitled to what he or she deposited. minus what he or she withdrew, plus a proportionate share of the interest earned by the account.’13 Notwithstanding this ownership arrangement, any of the account owners may with­ draw any amount from the account at any time, and the financial institution will honor the withdrawal request.111 When one of the parties dies, his or her net contributions to

the account pass according to the terms of his or her wi11 or  (in the absence of a will)

by the laws of intestacy.115

10-8:1.3 Multiple Party Account With Right of Survivorship

This type of account has all the features of the multiple party account without right of survivorship except that when an account holder dies, his or her share of the account passes to the surviving owners.116 However, this is so only because the parties to the account have a written agreement-signed by all parties including the decedent­ establishing the right of survivorship in the joint account117 The agreement normally contains language substantially similar to the following:

On the death of one party to a joint account, all sums in the account on the date of the death vest in and belong to the surviving party as his or her separate property and estate.118

No probate is necessary for the survivors to access the funds in the account. Nei­ ther a will nor the inheritance laws control the account. However, the IRS may seize the account to settle the tax debt of any of the owners.

10-8:1.4 Multiple Party Account With Right of Survivorship and Payable on Death Provision

The parties to this account own the account in proportion to their net contributions to it The financial institution may pay any sum in the account to any of the parties at any time. On the death of the last surviving party, ownership of the account passes to the POD beneficiary or beneficiaries.119

10-8:1.5 Trust Account

A trust account is an account with one or more persons named as trustee for the funds, and one or more persons named as beneficiary of those funds. During the life of the creator of the trust (referred to as the grantor or settlor), the funds belong to the trustee.12<) The beneficiary or beneficiaries have no rights to the account. The trustee may withdraw funds from the account.121 A beneficiary may not withdraw funds from the account before all trustees are deceased.l22 Upon the death of the last surviving trustee, ownership of the account passes to the beneficiary or bencficiaries.12.JAccord­ ingly, the trust account is not a part of the trustee’s estate and does not pass under the trustee’s will or by intestacy unless the trustee survives all of the beneficiaries and all of the other trustees.124

1-8        :2 Brokerage Accounts and Dividend Reinvestment Plans

When the decedent owned an investment account wherein he or she owned stock (such as with a brokerage account or a Dividend Reinvestment Plan) with an out-of­ state institution (as is the case with most Dividend Reinvestment Plans), the wording of the institution’s paperwork will determine what happens to the shares held by the decedent upon his or her death. For the account proceeds to pass outside probate, the paperwork must clearly indicate a right of survivorship or a POD designation; if it does not, the financial institution will in all likelihood demand Letters Testamentary and the asset will be subject to the probate process.

10-8:3 Automobiles

Texas now makes it relatively easy to transfer ownership of an automobile upon the death of the owner. Each Texas automobile title now contains a separate optional right of survivorship agreement that (1) provides that if the agreement is between two or more eligible persons, upon the death of one or more of the owners, the motor vehicle will be owned by the surviving owners; and (2) provides for the acknowledgment by signature, either electronically or by hand, of the persons.125 If the vehicle is regis­ tered in the name of one or more of the people who acknowledged the agreement. the title may contain a: (1) rights of survivorship agreement acknowledged by all the per­ sons or (2) remark if a rights of survivorship agreement is on file with the Department of Transportation.126 Upon the death of one of the owners (in our context, the elderly owner of the vehicle), the survivor can get title transferred to him or her by simply pre.sen ting the title and death certificate to the local tax assessor-collector’s office.12i

If the title lists both names but there is no right of survivorship, before transferring title, the tax assessor-collector will ask for Letters Testamentary, an Order Admitting Will to Probate as M uniment of Title, or an Affidavit of Heirship to a Motor Vehicle.izs

10-8 :4 Community Property Survivo.-ship Agreement

In 1987, Texas amended its Constitution so as to authorize community property survi­ vorship agreements.129 Stated simply, a community property survivorship agreement is an agreement between spouses creating a right of survivorship in community prop­ erty.130 When a married person who has executed such an agreement dies, his or her share of the community property described in the agreement passes to the surviving

spouse.131 Texas law holds that the agreement is effective lo pass title to the commu­ nity property without any further action.132

Nor.vithstanding the effectiveness of the agreement to pass title to the surviving spouse, Texas law provides that after the decedent’s death. the surviving spouse may apph• to the court for an order establishing that the agreement is valid and satisfies the requirements of the law.133 TI1is requires the surviving spouse to produce the orig­ inal community property survivorship agreement in court.131 Following the court’s adjudication that the community property survivorship agreement is valid, the surviv­ ing spouse must file the agreement with the County Clerk.135

Thereafter. the surviving spouse may sell any community property that he or she obtains through the community property survivorship agreement. but must wait 6 months after the date of the decedent’s death to make the sale.136 So long as the sur­ viving spouse has filed the agreement with the County Clerk. the purchaser is assured of good title.1J7

10-8:5 H the Survivor Spouse Receives Dividend Checks or Other Payments Made Out to the Decedent

Following the decedent’s death, it is possible for the surviving spouse to receive div­ idend checks or other payments made out to the decedent. These typically arrive in the mail. Should this happen. the surviving spouse has two options in dealing with these payments.

  1. First, the surviving spouse can return the payment, and request that a new check be issued to the “-estate of the decedent.”13f,
  2. Second, if a court of competent jurisdiction has already appointed an execu­ tor or administrator of the decedent’s estate and the check is either in pay­ ment for the redemption of currencies or for principal and/or interest on U.S. securities, payment for tax refunds, or payment for goods and services, the survivor can have the executor or administrator deposit the check in the dece­ dent’s account139 In endorsing the check, the executor or administrator must include, as part of the endorsement, an indication of the capacity in which the executor or administrator is endorsing. An example would be: “John Jones by Mary Jones, executor of the estate of John Jones.”140

If the decedent had an individual retirement account (IRA), if the financial institution distributes any proceeds to the beneficiary, the beneficiary will be obligated to include the amount received in his or her gross income for the year of receipt, and to pay all raxes due thereon.1-1i If the surviving spouse is the IRA beneficiary, he or she can roll over the IRA distribution into his or her own IRA. thus deferring the federal income tax.1-12 If the decedent had a large estate subject to the federal estate tax, the surviving spouse can defer the estate tax by utilizing the unlimited marital deduction.113

To receive the IRA proceeds or initiate the IRA rollover, the surviving spouse must contact the IRS trustee. He or she will need to supply the trustee with a copy of the decedent’s death certificate. Upon receipt, the IRA trustee will process the payment or IRA rollover.

10-8 :7 Trust Assets

If the decedent had executed a revocable living trust, it is likely that he or she named the surviving spouse as the successor trustee. This would minimize the procedures required to maintain the trust upon the decedent’s death. In reality, the ownership of this joint revocable living trust will not change; the trust will simply continue for the surviving grantor’s benefit. All assets in the trust will now be available to the surviving spouse-as they were while the decedent was sti11 alive.

If, however, the survivor is not named as the successor trustee, authority for man­ agement of the various trust assets will vest in the person who is named as successor trustee. In order to access the various trust assets, the successor trustee will need the original trust agreement and a copy of the decedent’s death certificate.

If the living trust contains credit shelter trust provisions, the successor trustee will have to re-title appropriate assets to fund the credit shelter trust The Elder Law attor­ ney will be able to guide the survivor in this process. If the successor trustee retains the same attorney who drafted the trust instrument, he or she will be familiar with the decedent’s intent in creating the trust, and will be able to advise the successor trustee in fulfilling it.

We note, however, that recent changes to tax law have made the credit shelter trust almost obsolete. One of the main purposes of a credit shelter trust is to limit estate taxes when the surviving spouse dies. Recent tax law changes have made the federal estate tax inapplicable to nearly all Americans. A certain amount of each per­ son’s estate is exempted from taxation by the federal government Under the most recent changes to this section of the Internal Revenue Code (IRC), the basic exclusion amount for the estate of a person dying between December 31. 2017, and January 1, 2026, is $10,000,000.H4 When adjusted for inflation pursuant to the provisions of the statute, us the amount was $11.4 million in 2019. TI1is meant that a decedent who died in 2019 with an estate valued at less than $11.4 million paid no federal estate tax.

Moreover, if the decedent had been married and had died withoul ever using any of his or her allowance, the surviving spouse could add the deceased spouse’s exclusion amount to his or her own.146 This means that for the decedent dying in 2019, S22.8 million dollars (the total value of both exclusions) is protected from federal estate tax­ ation without complex estate planning. Because most Americans do not have estates of that magnitude, the credit shelter trust-which used to be utilized to transfer assets to spouses to shield them from estate taxes-is slowly becoming obsolete.

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10-9      :1 Determining Tax Issues Facing Decedent’s Estate

The first task the attorney retained to represent the personal representative has to ful­ fill as regards taxes is to determine the tax issues facing the decedent’s estate-and, by extension, the personal representative. These issues depend on several factors:

  • Where was the decedent domiciled at the time of death?
  • What was his or her marital status?
  • ·what is the value of the decedent’s gross estate?
  • Diel the decedent die testate, or did he or she die intestate?
  • If the decedent died testate, to whom did the decedent leave his or her estate? Were there any charitable beneficiaries?
  • Did the decedent die owing a tax liability to any trucing authority?
    • At what point of the tax filing season did the decedent die?
      • Did the decedent die after filing his or her income tax return?
      • Did the decedent die before filing his or her tax return?
      • Did the decedent die after the close of the tax filing season without having requested an extension to file the return?

The importance of these factors arises out of one great and irreversible fact: Al the time of a person’s death, such person ceases to exist as a taxable entity. Indeed, as a result of the death, a newly created taxable e,ztity–called a,z estate-comes into being! Whether and when the decedent’s personal representative must file an income tax return for the decedent and/or the newly created taxable entity and the form or forms he or she needs to file depends on the point of the decedent’s tax filing season at which the decedent died.

10-9      :2 Filing Requirements and Forms Needed

In representing the personal representative professionally, the attorney must acquire a few forms from the IRS’s website (or from whatever tax preparation software product he or she uses). The attorney has no need to try and dazzle the client with reams and ’11S of useless forms; just stick to the basics-the forms one really and truly needs

•• the job done. The information in the following paragraphs presents a synopsis rnal Revenue Service Publication 559, Survivors, Executors a11d Administrators, sed and published on February 4, 2020. For more current information, please 1e IRS website at https://www.irs.gov/forms-pubs/about-publication-559.pdfl5J

10-10:2a Establishing the Estate-Form SS-4

The attorney’s-and the personal representative’s-first encounter with the Internal Revenue Service on behalf of the decedent occurs when they appJy for the estate’s Employer Identification Number (EIN). Whether the decedent died testate or intes­ tate, it is important that the personal representative obtains an EIN for lhe new tax­ able entity created by the decedent’s death. The application can be done by mail. by fax, or online at www.irs.gov. It is typically easier to app)y online. The personal representative–or the attorney acting on behalf of the personal representative-must be careful lo enter the decedent’s information EXACTLY as he or she had it on his or her last federal income tax return. For example, imagine a decedent who goes by the name “Vann Eze DerMann.” He signs his name that way, and as far as everyone is concerned, his name is “Vann Eze DerMann.” In reality, his name is ..Vann E. Zer­ mann,” and when he files his tax returns each year, that is the name he uses. If his personal representative is not aware of this bit of information, and thus does not relay the correct information to the attorney, they will most likely not be able to obtain the EIN for the estate. Hopefully, the death certificate would have the correct information and the error would be corrected.

1

Assuming the personal representative is aware of the intricacies of the decedent’s name and all other “secret information,” he or she-and the attorney-will be suc­ cessful, and the IRS will issue Form SS-4.

10-10:2b Form 56-Notice Concerning Fiduciary Relationship

Having obtained the EIN for the estate, the personal representative must now file Form 56, Notice Concerning Fiduciary Relationship, to inform the IRS of the creation of the fiduciary relationship under IRC § 690315 and provide the qualification for the fiduciary relationship under IRC § 6036.155 Note that Form 56 is not the same as, and does not serve the same purpose as, Form 2848. Form 2848 is for use by a taxpayer’s authorized representative in a controversy with the IRS.156 Although the fiduciary and the authorized representative may be the same person, a difference exists in the two roles:

  • The fiduciary (who files Form 56) is treated by the IRS as if he or she is actu­ ally the taxpayer. Upon appointment, the fiduciary automatically has both the right and the responsibility to undertake alJ actions the taxpayer is required to perform. For example. the fiduciary must file returns and pay any taxes due on behalf of the taxpayer. m In the estate administration context, titles used for a fiduciary would be ..executor,” “administrator,” or ..trustee.”
  • An authorized representative (who files Form 2848) is treated by the IRS as the agent of the taxpayer.’:.a He or she can perform only the duties authorized by the taxpayer. as indicated on Form 2848. An authorized representative is neither required nor permitted to do anything other than the actions explicitly authc rized by the taxpayer. In the estate administration context, an authorized repn sentative would be the attorney who represents the fiduciary or the accountar. or registered tax preparer retained by the fiduciary to prepare and file the ta’C returns. It is important to note that if the decedent had retained someone as an authorized representative prior to his or her death, that relationship ends upon the decedent’s death. That person can no longer speak for the decedent, and cannot speak for the estate unless the fiduciary appoints him or her as the authorized representative.

10-10:2c Decedent’s Final Form 1040 (or Intermediate

Form 1040, if Necessary)

If it is necessary that the personal representative files an income tax return for the decedent, the return will typically be due by April 15 folloruit,g the year of the dece­ dent’s death. However. that return may or may not be the only return to be filed by the personal representative.111e number of returns to be filed is dependent on just when the decedent died, and on what stage he or she was at vis-a-vis the tax filing season at the time of death.

…

10-10:2d Form 1310: Claiming a Refund for a Decedent

If the personal representative is claiming a federal income tax refund for the dee dent, he or she must file Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer with the rcturn.168 The return preparer must attach a copy of the court certificate to the return showing that the personal representative was appointed to that office (testator or administrator). Strictly speaking, the Letters Testamentary or Letters of Administration should be sufficient to file with the tax return, but in the abundance of caution, it is wise that the personal representative file Form 1310 also.:””‘

lf, however, the decedent had been married and the person claiming the refund is the decedent’s surviving spouse filing a joint return with the decedent. the surviving spouse would not need to file Form 1310. i;o

10-10 :2e Form 1041: U.S. Income Tax Return for Estates and Trusts

The EIN issued to the personal representative will state the date by which the rep­ resentative must file the estate’s Form 1041. Form 1041 is used to file the following information:171

  • the income, deductions, gains, and losses of the estate:
  • the income that is either accumulated or held for future distribution or distrib­ uted currently to the beneficiaries;
  • any income tax liability of the estate; and
  • employment taxes on wages paid to household employees employed by the estate.

10-10:2f Form 8822: Change of Address

The attorney uses Form 8822 to notify the IRS of a change in the decedent’s mailing address. The attorney would, on behalf of the personal representative, file this form to have all correspondence from and with the IRS be sent to an address different to the decedent’s former address. This is necessary because, after all, the decedent is dead and no longer lives at the last known address the IRS has on file for him or her.

10-9          Income Tax Issues for the Estate, Fiduciaries, Survivors, and Heirs

111e following section focuses on the effect of an elderly person’s death on the income tax benefits, liabilities, and filing responsibilities of his or her survivors (including

…

his or her widow or widower), heirs, beneficiaries, estate, and fiduciaries. TI1e truth is that these effects are not limited to relatives and associates of the elderly, but can happen to anyone who has lost a loved one. Still, the focus of this book is the elderly.

10-11: 1 Income Tax Issues of Survivors and Heirs

The attorney should ensure that the decedent’s survivors and heirs are aware of the following income tax rules and principles that will affect them following their loved one’s demise:

  1. 1f the decedent qualified as some other person•s qualifying relative for the part of the year during which he or she was alive, the surviving taxpayer can claim the full tax benefits for the year regardless of when death occurred during the year.17
  2. Jf the decedent was married, his or her surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years if he or she has a dependent child by filing as ..qualifying widow(er) .”1i3 For the year that the decedent dies, the surviving spouse files a joint return with the decedent For the next 2 years, if the surviving spouse has a dependent child-but not a foster child-he or she can file as a ·•qualifying widow(er),” using the tax rates for a married couple filing joint.174

Generally, a survivor can file as a surviving spouse for this special benefit if

he or she meets all of the fo11owing requirernents:175

  • The survivor was entitled to file a joint return with the decedent spouse for the year of de.ath, whether or not they actually filed jointly.
    • The survivor did not remarry before the end of the current tax year.
    • The survivor has a child or stepchild who qualifies as a dependent for the tax year.
    • The surviving taxpayer provides more than half the cost of maintain­ ing a home. which is the principal residence of that child for the entire year except for temporary absences.

In short, a surviving spouse who does not have a dependent child living with him or her is not a qualifying widow or widower and must file as a surviving spouse. We note that the last year in which a surviving spouse can file jointly with, or claim an exemption for, a deceased spouse is the year of the decedent’s death.

10-11:2 Income Tax Issues of the Estate and its Fiduciaries

Before one can discuss the income tax issues facing the estate and its fiduciaries, one should first become familiar with some basic rules governing estates and their fiduciaries.

10-11  :2.1 Estate Basics

At the moment that a person dies, a new entity-the estate-comes into existence as a new taxpayer.

For income tax purposes, the estate begins with the probate estate. This “probate estate” includes all property that comes under the control or the personal represen­ tative by operation of either the will (where the decedent died testate) or state law (where the decedent died intestate)Y6

The estate begins on the date of the decedent’s death and continues until the final distribution of the assets is made to the beneficiaries.

10-11 :2.2 The Role of the Personal Representative

The personal representative oversees the estate. Typically, if the decedent died testate-that is, with a will-the personal representative is called an “Executor; if, on the other hand, the decedent died without a will, the personal representative is called an “Administrator.” The personal representative is responsible for:

  • collecting and conserving all probate assets;
  • paying all legitimate liabilities (including all truces);
  • preparing all tax returns (or having them prepared); and
  • distributing the remaining assets to the proper heirs or beneficiaries.

10-11:2.3 The Governing Instrument

To perform his or her duties properly, any fiduciary appointed by the will or by a court of competent jurisdiction must carefully read and evaluate the estate’s governing instrument. For the personal representative, that instrument is the decedent’s will.

The governing instrument of a trust is a trust document. If the trust is a testamen­ tary trust, it would be included in the decedent’s will. The trustee must be given a copy of the will that he or she may read and evaluate the terms of the trust.

If the decedent died intestate, the personal representative and the tax preparer should familiarize themselves with the intestacy laws of the state where the decedent was domiciled because these laws would constitute the governing instrument for the estate.

In the final analysis, then, the governing instrument, along with the appropriate state laws, will give guidance to the personal representative and the rax preparer on the following matters:

  • identification of beneficiaries;
  • distributions to be made to the beneficiaries;
  • special allocations of income or expenses; and
  • fiduciary accounting income.

10-11:2.4 Income of an Estate

To properly file Form 1041, the personal representative and the tax preparer must know and understand the income of the estate.

:\n estate’s taxable income includes all income from assets coming under the con­ trol of the personal representative during the period of probate administration, subject to the rules oi community property. m

The estate must also report income from items passing to the estate as a named beneficiary (or under state law-such as where a named beneficiary predeceased the decedent and no contingent beneficiary was named and therefore the property passed to the decedent’s estate).

Other circumstances that give rise to income include the following:

  1. If the decedent died owning personal property owned solely in his or her name, any income earned by such property is considered income of the estate. This is so because title to the property passed to the estate upon the decedent·s death. Ownership of the assets will not pass to the beneficiaries until the per­ sonal representative has distributed them to such beneficiaries.
  2. If the decedent’s will transfers solely owned personal property to a testamen­ tary trust, the estate will report the income from such personal property from the date of death until the time the property is lransferred to the trust. This transfer normally takes place at the end of the probate process.
  3. But note that if the decedent operated a business or farm up to the date of his or her death, the estate is not considered by law to operate the business or farm unless the will contains specific language directing the estate to continue the operation of this activity.

10-11:2.5 Income Reported-or Not Reported-by the Beneficiaries

In our Trusts and Estates class al law school, we learned that the will beneficiaries are the “natural objects of the testator’s bounty.” What are the income tax consequences for them of receiving this bounty-this property?

As an initial matter, the estate’s gross income does not include income from items passing directly to the decedent’s beneficiaries,178 or (under community property laws) the surviving spouse.

Following are some commonly encountered situations in which income from assets will not be subject to estate income taxation because it is paid directly to the estate beneficiaries:

  1. property owned jointly with right of survivorship;
  2. property registered as POD;
  • employee death benefits and deferred compensation payable directl,yto desig­ nated beneficiaries;
  • IRA Keogh, SEP-IRA. and other qualified retirement plans payable directly to a named beneficiary; and
  • property tit1ed in the name of a living trust where the trust provides for the distribution to heirs.

10-12       Income, Deductions, and Exemptions

As the personal representative and the attorney/tax preparer sort through the dece­ dent’s paperwork to file his or her final Form 1040 and the estate’s Form 1041, they will be trying to determine which items constitute income, which ones constitute expenses–and, thus, deductions-and which ones are exemptions and thus neither reportable as income nor deductible therefrom. They will also have to determine which items must be reported on the final Form 1040, and which ones on the estate’s Form 1041. lf the taxpayer owned a business concern, the personal representative and the tax preparer will have to determine whether he or she ran it on a cash or accrual basis.111e following paragraphs offer some guidance on these issues.

10-12:1 Actual or Constructive Receipt and Disbursement

All income actually or constructively received before the death o.f the decedent is included on the final Form 1040.

All items paid before the death of the decedent are deducted on the final Form 1040.

10-12 :2 Income in Respect of a Decedent

All gross income that a decedent had a right to receive at death but was not actua11y or constructively received is not included on his or her final Form 1040 because these items are “IRD.”

If the decedent’s will does not designate a beneficiary of these lRD items, they are reported on the estate’s Form 1041 as income.179

If the decedent’s will names a beneficiary or the property is transferred by oper­ ation of law, then this IRD income is reported by the beneficiary on his or her Form 1040. ISO

10-12:3 Character of Income

In receiving and reporting income, it is important to note, and to maintain, the char­ acter of such income. The general rule is that the character of income received in respect of a decedent is the same as it would have been to the decedent if he o,r she were alive.181 For example, if the income would have been a capital gain to the

decedent. it v.ill be a capital gain to the estate-and to the beneficiary who eventually receives it.

10-12:4 Deductions in Respect of a Decedent

Ta>.-payers are a1lowed various deductions on their tax returns. Some deductions are personal. available to every taxpayer; others are available to taxpayers engaged in business enterprises. After the taxpayer dies and his or estate is going through the probate process, the personal representative and the attorney/tax preparer must make some decisions regarding these deductions. They have two principles to guide them:

  1. If the decedent had obligations before death that were not paid at the time of death, these items are termed “deductions in respect of a decedent.”182
  2. Items such as business expenses, interest, taxes, and income producing expenses for which the decedent was liable at death, but were not paid before death, are deducted by either the estate on Form 1041 or the beneficiary on Form 1040, as the case may be.183

10-12:5 Income and Expenses After Death

If the decedent used the cash basis method of accounting (as most people do), there would be both IRD and Deductions with Respect to a Decedent (DRD) for the income earned and expenses incurred before death but brought to light after the death of the decedent

10-12:6 Wages

On occasion, the personal representative receives wages for the decedent after he or she dies. There is a proper method of reporting such wages for income tax purposes.

First, we note that wages actually or constructively received prior to the decedent’s death are included on the final Form 1040.111-1Any wages received after the decedent’s death are IRD and are reported either by the estate on Form 1041185 or by the benefi­ ciary who receives said wages on his or her own Form 1040.181;

Next. note that the decedent’s Form W-2 Box 1, Income Subject to Federal Tax, to be used in preparing his or her final Form 1040 includes only the actual gross wages received. The Social Security and Medicare Wages, Boxes 3 and 5, include 100% of the actual amount and accrued amounts.

Third, the IRD is to be reported by the employer on Form 1099 MISC as non­ employee compensation in Box 3, and is not subject to self-employment tax.

Fourth, it is important to note that the term “wages” does not include any payment by an employer to a survivor or the estate of a former employee made after 1972 and after the calendar year in which such employee died.187 Hence, such payments are not subject to income taxation as wages.

10-12:7 Interest and Dividends

As regards interest and dividends, the rules are many:

  1. Amounts received prior to death are included on the final Form 1040.
  2. Any amount earned from the date of the last interest compounding date prior to death up to the date of death is IRD.
  3. Interest and dividends earned after death are reported by the estate on Form 1041 or by the beneficiary on his or her Form 1040.
  4. All dividends received prior to death are included on the final Form 1040.
  5. Any dividend declared before the decedent’s death but not received by then is HID and is included on the estate’s Form 1041 or the beneficiary’s Form 1040.
  6. Before reporting interest and dividends that should rightly be included on the decedent’s final Form 1040, the personal representative should ensure that he or she receives a Form 1099 evidencing the payment
  7. Likewise, the personal representative should receive a separate Form 1099 showing the interest and dividends includible on the returns of the estate or other recipient after the date of death and payable to the estate or other recip­ ient (i.e., the beneficiary).
  8. If the Form 1099 does not reflect the correct recipient or amounts, the per­ sonal representative should request a corrected Form 1099 from the payor.

10-12:8 Treatment of Self-Employment Income

If the decedent had been operating a sole proprietorship or was involved in a partner­ ship or some other form of business enterprise, the personal representative might be faced with self-employment income and self-employment tax issues. The attorney/tax preparer must be ready to give adequate representation:

  1. The attorney/tax preparer should report self-employment income actually or constructively received or accrued, depending on the decedent’s accounting method.
  2. For self-employment tax purposes only, the decedent’s self-employment income will include the decedent’s distributive share of a partnership’s income or loss through the end of the month in which deatl1 occurred.
  3. For this purpose only, the partnership’s income or loss is considered to be earned ratably over the partnership’s tax year.

10-12:9 Treatment of Rental Income, Expenses, and Depreciation

lf the decedent owned rental property, the income, expenses, and depreciation deduc­ tion thereof are treated as fo11ows:

  • Income received and expenses paid prior to the decedent’s death are deducted on the decedent’s final Form 1040.
    • Income accrued and expenses incurred prior to death are reported as IRD and DRD by the estate on the estate’s Form 1041 or passed on to the underlying beneficiaries also as IRD and DRD.
    • Income received and expenses incurred after death are reported on the estate’s Form 104 l or passed on to the beneficiaries.
    • Depreciation is prorated for the period ending on the date of the decedent’s death.
    • Depreciation is based on a stepped-up fair market value on the date of death under the new statutory method and life.
    • The estate is not permitted to elect IRC § 179 expensing on new personal prop­ erty acquired after the decedent’s death.
    • The ..short year” rules for depreciation apply for any tax year the estate has that is less than 12 fu11 months.

10-12:10 Partnership Income or Loss: Partnership Closes Books on Decedent’s Date of Death

Uthe decedent had been involved in a partnership, the following rules would control the distribution of partnership income or loss:

  1. The tax year of the partnership closes for the partner on the date of the dece­ dent’s death.188
  2. The decedent’s income and losses up to the date of death would be reported on his or her final Form 1040.18′.)
  3. All income and loss after the date of death is reported on the estate’s Form 1041190 or the Form 1040 of the underlying bcneficiary.191

10-12:11 IRA and Pension Distributions: Decedent’s Distributions Prior to Death

Decedents sometimes die possessed with interests in pension plans and IRAs. Spe. cific rules exist on the tax issues arising from the existence of these interests. Some of these rules include the following:

  1. Distributions received prior to death are included on the decedent’s final Form 1040.192
  2. An amount distributable before death and received after death is IRD to the estate193 or designated beneficiary or beneficiaries,194 and js reported accord­ ingly.
  3. Distributions received after the decedent’s death are also IRD395 and are not subject to the 10% early withdrawal penalty even if the decedent was younger than 59.5 years at the time of his or her death or the recipient is younger than 59.5.196
  4. A surviving spouse who is named as the beneficiary of a decedent spouse’s IRA may roll the decedent’s IRA into his or her own traditional IRA. or, to the extent it is taxable, roll it over into a:
    1. qualified employer plan;
    1. qualified employee annuity plan (section 403(a) plan);
    1. tax-sheltered annuity plan (section 403(b) plan); and
    1. deferred compensation plan of a state or local government (section 457(b) plan), or treat himself or herself as the beneficiary rather than treating the IRA as his or her own.191

10-12 :12 Post Death Required Minimum Distribution

(RMD) Rules

After the decedent’s death, the IRA-whether the old one or the newly rolled over one-will eventually make distributions to the beneficiary. It is useful to know just how these distributions will be taxed.

First, if the IRA or qualified pension plan has a designated beneficiary, the remain­ ing account balance will be distributed over the remaining life expectancy of the bene­ ficiary whether or not the decedent died before or after the required beginning date.19,S

Second, if the plan does not have a designated beneficiary and the decedent dies after the required beginning date (generally April 1 following the year in which the decedent owner dies), the remaining balance is paid out over the remaining life expec­ tancy of the decedent owner of the IRA or qualified plan.

Retirement Topics – Beneficiary

Third, if the IRA or qualified plan does not have a designated beneficiary and the decedent owner dies before the required beginning date, the account balance must be distributed within 5 years after the year of the decedent owner’s death.199

10-12:13 Estate and Administration Expenses on Form 1041

The estate is entitled to a series of deductions on Form 1041. First are the estate administration expenses that would be deducted on the estate’s Form 1041. These are the expenses incurred as a result of the decedent’s death.

The IRC provides that estate administrative expenses should be deducted as expenses of the estate, and thus should be deducted on the estate’s Form 706, the Estate Tax Return. However, IRC Section 642(g) contains an election provision whereby an executor may “elect” to deduct administrative expenses on a timely filed Form 1041 (including extensions).201 The executor must also attach a waiver state­ ment that the estate will not deduct these expenses on the Estate Tax Return, Form 706. Section 642(g) also provides that these administrative expenses can be partially elected and waived, showing which expenses are being deducted on the estate’s Form 1041 while retaining the other administrative expenses on Form 706.102

U these expenses are deducted on Form 1041, any allocable expenses must be allo­ cated between exempt and non-exempt income. The amounts a11ocated to tax-exempt income are not deductible.203

Only the “reasonable” amounts for “administrativeH expenses are deductible on either Form 1041 or Form 706.20i

10-12:14 Funeral Expenses

Notwithstanding IRC § 642(g), funeral expenses are never deducted on either Form 1041 or Form 1040. They are deducted only on Form 706.205

10-12:15 Interest Expenses

The IRC allows the deductibility of interest expenses from the following sources:

  • qualified mortgage interest;
  • investment interest.;
  • passive interest; and
  • business interest.2(J(i

To the extent that a decedent incurred such interest expense during the year of his or her death, he or she is allowed these deductions on the final Form 1040 filed on his or her behalf.207

10-12:16 Charitable Contributions

Generally, taxpayers can make deductible charitable contributions of up to 50’¼ of their adjusted gross income.208 A decedent is no exception. However, any amounts not deducted on the final Form 1040 are lost. Charitable contributions are not trans­ ferable to the estate’s Form 1041 or to a beneficiary’s Form 1040. In short, charitable contributions made by the estate after the decedent’s death are deductible only if the decedent’s will provides that the contributions be paid out of the taxable income of the estate. This is true even if the beneficiaries agree that a contribution can be made from the estate funds.209

10-13      Texas Tax Issues

Although Texas does not have an income tax, it is possible for someone to die and for his or her survivors to face tax issues with state, county, or municipal authorities in Texas. It therefore behooves the personal representative-and the anorney repre­ senting him or her-to quickly try to settle these tax issues.

10-13:1 Property Tax Issues

The most common local tax issue decedents leave behind is the property tax. Dece­ dents typically owe real property taxes. If the decedent’s home is encumbered by a mortgage, the mortgage holder will settle the tax bill. But if the home .is not encum­ bered by a mortgage, it is the responsibility of the personal representative to contact the county tax assessor or county appraisal district and settle any outstanding prop­ erty tax liability.

In the event the decedent was a sole proprietor or the sole shareholder in an LLC or otherwise was the owner of a business enterprise, it would be quite likely that he or she also owed personal property taxes at the time of his or her demise. Once again, a visit to the county tax assessor of county appraisal district should lead to a resolution of these outstanding tax issues.

10-13  :2 Taxes Administered by Texas Comptroller of Public Accounts

The Texas Comptrol1er of Public Accounts administers 60 separate taxes. fees, and assessments in the state of Texas, including sales taxes collected on behalf of more than 1,400 cities, counties, and other local governments around the stale. The Comp­ troller also administers the franchise tax, motor vehicle taxes, and sales and use tax. If the decedent operated any type of business, the personal representative and his or her attorney should make an inquiry of the Office of the Texas Comptroller of Public

Accounts to determine whether the decedent died owing any taxes. lf the decedent dies owing any such taxes, the personal representative (using estate funds) must settle these liabilities.

10-14      Federal Wealth Transfer Taxes

There was a time when the federal wealth transfer taxes-the gift, estate, and generation-skipping transfer taxes-were of much concern to many Americans. In those days, the unified credit-that is, the amount of assets that each person is allowed to gift to other parties without having to pay gift, estate, or generation-skipping trans­ fer taxes-was significantly lower than it is today. Currently, the credit is very high. In 2019, for example, the credit was $11.4 million.210 The figure will be higher in 2020. The net effect is that few, if any people, currently pay the federal wealth transfer taxes. This may be good news to Texas, because Texas does not impose an inheritance tax either. Accordingly, any property someone living in Texas receives from a Texas dece­ dent is received free of any wealth transfer taxation.

see chapter pf

Posted on

Trusts

The cost of a living trust will often be three to five times more than the cost of preparing a will. In the short term, a will would seem to be more economical. But think again: When your estate goes through probate, as most often happens when you have chosen a will, the costs of the probate administration will usually run between 5% to 10% of the gross value of your estate. Even with a modest $200,000 estate, the probate related cost could run your estate $10,000 to $20,000, or more.

Who Will Manage Your Assets if You’re Incapacitated?

Settlor, Grantor, Trust-Maker, and Trustor

The terms grantor, settlor, trust-maker, and trustor all mean the same thing for estate planning purposes. All refer to the person who creates a trust. That individual can be different from other titles seen sprinkled throughout the trust agreement, which is where things can get a bit confusing.

The trustee is the individual charged with managing the trust. Often, the trust-maker of a revocable living trust will appoint themselves as the trustee (the handler of the trust) of their own trust. In that case, all of the terms—”settlor,” “trustor,” “grantor,” and “trustee”—refer to the same person.

That isn’t the case with irrevocable trusts, which typically require that the trustor hand over control of the trust to another party appointed to act as the trustee. 1

In nearly all revocable living trusts, the Grantor of the trust is also the primary beneficiary of the trust. Children or other named successor beneficiaries only benefit from trust assets after the death of the Grantor.

Definition of a “Grantor, Settlor, or Trustor” of a Trust, Foundation paper one – What is a Trust?

trust settior

Introduction

In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.1

A trust is formed under state law.2 In Texas, as elsewhere, trusts are rea11y simply a method by which one person (the trustee) holds property for the benefit of another person or group of persons (the beneficiary or beneficiaries). To establish a trust, someone (the settlor) must transfer title to identified property, with the specific intent to create a trust, to the trustee, who then manages and administers that property for the benefit of the beneficiary.3 In Texas, unless the instruments creating the trusts set out specific instructions, statutes will govern the trustee’s duties, rights, and liabilities toward the trust property and the beneficiary.

This chapter will discuss these issues as they relate to the elderly. In doing so, we shall discuss trusts wherein the elderly are either beneficiaries or settlors.

Creation and Validity of Texas Trusts

We have already noted that in Texas, in the absence of specific instructions set out in trust instruments, statutory law will govern the relationship between trustees and the trust they administer. The truth is, Texas has an entire body of law-the Texas Trust Code, which is itself embedded in the Texas Property Code-that governs the operation and administration of trusts in the state. The Code applies to (1) aU trusts created after January 1, 1984;1 and (2) all transactions after January 1, 1984, involving trusts even if the trust was created before January 1, 1984.5

9-2:1 Creation of Trusts

Several methods are available to a person who wants to create a trust. Two of the most common are the inter vivos or living trust and the testamentary trust.

9-2:1.1 Inter Vivos or Living Trusts

An inter vitJos or living trust is established while the settlor is alive with the intent that it will take effect while the settlor is still alive.6 l11e two basic methods a settlor may use to create an inter vivos trust are distinguished by the identity of the person who holds legal title to the trust property.

In the first method. a declaration (or self-declaration) of trust, the settlor declares himself or herself to be the trustee of certain property for the benefit of one or more beneficiaries. to whom he or she transfers equitable title.7111e settlor retains the legal title and is subject to self-imposed fiduciary duties.8

Under the second method, a transfer or conveyance in trust, the settlor transfers legal title to another person as trustee and imposes fiduciary duties on that person to manage the property for the benefit of either third parties or the settlor or both.9

9-2:1.2 Testamentary Trusts

We first encountered testamentary trusts in Chapter 8, as we discussed their inclusion in wills. \\Te discuss them again at this juncture to understand how they function as trusts.

Essentially, a settlor can establish a trust to take effect upon the settJor’s death by including a gift in trust in the settlor’s Last Will and Testament.10 l11e transfer of title to the trustee and the imposition of trustee duties on him or her do not occur until the settlor dies.

\Ve note that a pre-condition to the validity of a testamentary trust is that the Last Will and Testament of which it is a part must be valid. If the will fails, any testamen­ tary trust contained in that will is also ineffective. After the Last ·will and Testament is admitted to probate, the trust wi11 be examined to determine its validity. The fact that the Last Wi11 and Testament is valid does not grant automatic validity to the trust.

9-2:1.3 Intent to Create a Trust

A trust is established only if the settlor manifests the requisite intent to create a trust.11 A transferor of property has trust intent if he or she (1) divides title to the property into legal and equitable components and (2) imposes enforceable fiduciary duties on the holder of legal title to deal with the property for the benefit of the equitable holder.12

No particular words or conduct is necessary to establish trust intent. By the same token, the mere use of trust terminology alone is insufficient to show trust intent

Subtitle B  Texas Trust Code: Creation, Operation, and Termination of Trusts  Chapters

  • 112         Creation, Validity, Modification, and Termination of Trusts

9-2:1.4 Consideration Not Required

Because a trust is a type of gratuitous property transfer, rather than a contractual arrangement, consideration is not required for the creation of a trust.13

9-2:1.5 Satisfying the Statute of Frauds

Generally, to be enforceable, a trust must be in writing.11 The writing must contain

(1) evidence of the terms of the trust (i.e., the identity of the beneficiaries, the proi:r erty, and how that property is to be used) and (2) the signature of the settlor or the settlor’s authorized agent.15

The above-mentioned requirements satisfy the Statute of Frauds. The policy under­ lying the requirement that trusts be evidenced by a writing is to protect a transferee who actually received an outright conveyance from having those rights infringed upon by someone claiming that the transfer was actually one in trust. Thus, an alleged trustee will use the lack of a writing to raise the Statute of Frauds as a defense to a plaintiff who is trying to deprive the alleged trustee of that person’s rights as the donee of an outright gift

The strict requirements of the Statute of Frauds are almost always enforced where the trust property consists of real property.16 That having been said, however, a court may enforce an oral trust of real property if the trustee partially performs. If the alleged trustee acts, at least temporarily, as if a trust exists, he or she may be estopped from denying the existence of a trust at a later time and claiming the property as th\ donee of an outright gift.

As regards trusts of personal property, two instances arise where the rules a: sometimes relaxed. First, an oral trust of personal property may be enforceable if thl trustee is neither the settlor nor a trust beneficiary and the settlor, either prior to or at the time of establishing the trust, expresses the intention to establish itY Second, a trust consisting o( personal property may be enforceable if it is in the form of a written declaration by the settlor who is also the owner of the property being transferred into trust and he or she now holds the property as trustee either for a third party or for himself or herself and a third party as beneficiaries.18

9-2:1.6 Trust Property

A trust is a method of holding title to property. Consequently, a trust cannot be cre­ ated unless it contains property. rn Any type of property-real, personal, tangible,

intangible. legal. and equitable. including property held in any digital or electronic medium ‘)-may be held in trust.21

Of course. in order to transfer property into a trust, the settlor must own the proir erty and must have the authority to transfer it. Accordingly, if a person cannot transfer the property-such as where the property belongs to another person, the property has valid restrictfons on its transfer, or the proposed trust res is an expectancy to inherit from someone who is still alive-he or she cannot transfer the property into a trust.:!! It is important. then, that before the elderly client directs his or her attorney to draft the trust instrument, he or she is certain that he or she (1) owns the proposed trust property and (2) has the authority to transfer it into trust.

TI1e trust creator must also ensure that legal title to the trust property reaches the hands of the trustee. It is not enough for the settlor to sign a trust instrument, own assets that would make good trust property, and intend for that property to be in the trust. TI1e settlor must go one step further and actually transfer or deliver the proir erty to the trustee.:?3

As a final matter, we note that if a settlor transfers property to a “qualifying trust” (basically a revocable living trust) that otherwise would qualify as the homestead of the settJor or the beneficiary had it not been transferred into the trust, this property may still qualify as the settlor’s or beneficiary’s homestead if the person occupies and uses it as his or her homestead.21 Accordingly, the homestead does not lose the creditor protection it would normally have merely because the homestead property is being held in trust.

9-2:1.7 Additions to Trust Property

Genera11y, property may be added to an existing trust from any source and in any manner. However, additions of property are not permitted if either (1) the terms of the trust prohibit the addition or (2) the property is unacceptable to the trustee (the trustee’s duties may not be enlarged without the trustee’s consent) .:i6

9-2:1.8 Capacity of the Settlor

When we studied wills. we saw how important the concept of capacity was to the validity of a Last Will and Testament. The concept is just as important in the realm of trusts.

Beginning with the settlor (for our purposes, the elderly person desirous of trans­ ferring property in trust), to create a trust, such settlor must have the capacity to convey property.27 This requirement does not impose upon the settlor any different standard than he or she would face in a non-trust situation involving the conveyance

of properly. Accordingly, the capacity required to create an inter vivos trust is typically the same as the capacity to make an outright gift and the capacity to create a·testamen­ tary trust is the same as the capacity to execute a Last Will and Testament.28

9-2:1.9 Capacity of the Trustee

While it is important-particularly in the Elder Law context-to ensure that the settlor possesses the legal capacity to create a trust, it is also important that the trustee have the capacity to serve in this role. In short, the trustee must have the ability to take, hold, and transfer title to the trust property.29 What this means is that if the trustee is an individual, he or she must be of legal age (or have had the disabilities of legal age removed) and must be competent. lf the trustee is a corporate entity, it must have the power to act as a trustee in Texas.30 A trustee may also be the settlor or a beneficiary of the same trust so long as the sole trustee is not also the sole beneficiary.31

9-2:1.10 Acceptance by the Trustee

A person does not become trustee merely because the sett.lor names him or her as trustee of the trust. The settlor cannot force legal title and the accompanying fiduciary duties on an unwilling person. Hence, someone named as trustee must take some affirmative step to accept the position. Once the trustee has accepted the office, he or she is responsible for complying with the terms of the trust as well as applicable law.

The trustee may indicate his or her acceptance of the trust in two main ways. First, the trustee may sign the trust instrument or a separate acceptance document.32 \\’hen creating an inter vivos trust, it is common practice for attorneys to have the trustee sign the trust instrument at the same time as the settlor. TI1e signature of the trustee is conclusive evidence of acceptance.

Second, the trustee’s acceptance may be implied from his or her behavior-be­ havior of a nature whereby he or she has started to act like a trustee by exercising trust powers or performing trust duties.33 However. if the named trustee merely acts to preserve trust property after which he or she gives notice of his or her rejection of the office of trustee, or the person merely inspects or investigates the trust property, he or she will not be deemed to have accepted the office of trustee.34

If the named trustee does not accept, the office of trustee will pass to the alternate trustee named in the trust instrument.35 If the alternate trustee is dead or the trust instrument does not name one, an interested person may petition the probate court to appoint someone as trustee, whereupon the court will indeed appoint someone.36

9-2:2 Validity of Trusts

An elderly person who creates a trust must be concerned that the trust is valid. Several issues could affect a trust’s validity, including the legality of the trust’s pur­ pose. the reservation of interests and powers by the settlor, and whether the trust satisfies the doctrine oi merger and the rule against perpetuities. We shall discuss some of these issues.

9-2:2.1 Trust Purposes

As an initial matter, in Texas, the settlor may create a trust for any purpose as long as that purpose is not illegal.37 In short, the terms of the trust may not require the trustee to commit a criminal or tortious act or an act that is contrary lo public policy.38

Courts have used two main approaches in evaluating the legality of a trust purpose. The first analysis concentrntes on the settlor’s intent and the effect of the trust’s exis­ tence on the behavior of other persons. Under this intent approach, a trust is illegal if the existence of the trust could induce another person to commit a crime even if the trustee does not have to perform an illegal act.39 This is the majority approach in the United States, and the one adopted by Texas.·10 The second approach focuses on how the trust property is actually used, rather than on the motives of the settlor;·11

9-2:2.2 Active and Passive Trusts: Statute of Uses

The historical origin of the two components of trust intent, the split of title and the imposition of duties, is derived from the common law history of trusts. The common law precursor to a trust was called a “Use.” Hence, the old English statute governing trusts was called the Statute of Uses.·12 Under that statute, a beneficiary’s equitable interest in real property was turned into a legal interest as we1l. 1l1is had the effect of eliminating the legal interest the trustee formerly held. making the beneficiary the owner of all title, both legal and equitable. The beneficiary was also fully responsible for all of the burdens of property ownership.

The Statute of Uses was repealed by the Law of Property Act.·13 Even before the amendment took effect, several exceptions had developed to the Statute of Uses. Among these was the exception for the active trust, renected in today’s Texas Trusts Code.H

An active trust is an arrangement wherein the trustee’s holding of property is not merely nominal in an attempt to gain some untoward benefit, but where the trustee actually needs legal title to the property to perform a power or duty relating to the

beneficiary’s benefit.·15 In the absence of this arrangement, the purported trust is not valid, and title to the real property vests directly in the beneficiary. 16

Although the Texas Statute of Uses applies only to real property, a similar result would be reached for personal property because without a true split of title and impo­ sition of duties, the purported trust would fail to meet the definition of “express trust” required by the Texas Trusts CodeY

9-2:2.3 Reservation of Interests and Powers by the Settlor

An elderly person who retains the services of an attorney to draft a trust instrument on his or her behalf may well have two seemingly incompatible goals reference the gift he or she wishes to put in trust: the ability to make the gift and the ability to retain some control over the gift. May a settlor create a trust yet also retain considerable interests in, and powers over, the trust property?

Texas law takes a very liberal approach to this issue, providing that a settlor may retain virtua11y all interests over the trust property provided the trust creates some beneficial interest in another person.•1s Pursuant to the Texas Trusts Code, the settlor can retain the interests or powers without affecting the validity of the trust:

  1. a beneficial life interest for himself or herself;
  2. the power to revoke, modify, or terminate the trust in whole or in part:
  3. the power to designate the person to whom or on whose behalf the income or principal is to be paid or applied;
  4. the power to control the administration of the trust in whole or in part;
  5. the right to exercise a power or option over the trust property or over interests made payable to the trust under an employee benefit plan, life insurance pol­ icy, or otherwise; or
  6. the power to add property or to cause additional employee benefits, life insur­ ance, or other interests to be made payable to the trust at any time. 9

In light of a11 the powers that can be retained by the settler, the beneficial interest created in the other person could be quite weak. Indeed, it could be contingent upon some future event or be subject to revocation by the settlor!50

9-2:2.4 Doctrine of Merger

As the elderly person begins to consider establishing a trust, he or she must be careful to ensure that he or she does not, as settlor, transfer both the legal title and all equita­ ble interests in property to the same person; if this happens, a trust will not have been

created, and the transferee would hold the property as his or her own.51 1l1e same result will pertain if the settlor retains both the legal title and all equitable interests in the trust property in himself or herself as the sole trustee and the sole beneficiary.52

If. after the initial creatfon of the trust, legal and equitable interest becomes reunited in one person (such as if the same person becomes the sole trustee and sole beneficiary). merger occurs and the trust will cease to exist.33 Of course, this is just what happens when the trust terminates and the trustee distributes the trust property to the remainder beneficiaries. However, merger could occur earlier either because of circumstances the settlor did not anticipate or because the trustee and the beneficiary are working together to terminate the trust. Because a trustee could work together to circumvent the settlor’s intent and cause the trust to terminate, Texas law holds that a trust containing a spendthrift provision5-‘ will not end via merger unless the settlor is also the beneficiary. Instead, the court will appoint a trustee to keep the title split.56

9-3 Types of Trusts of .Interest to the. Elderly

As the elderly look back on their lives and look forward to their “sunset years,” they may be interested in four types of trusts, in particular: (1) the revocable living trust.

(2) charitable trusts, (3) a trust for the care of animals (also known as the pet trust), and (4) a spendthrift trust. We dedicate the rest of this chapter to discussing these four types of trusts.

9-3:1 The Revocable Living Trust

As compared to the ”regular” trusts we have been discussing thus far, a Texas living trust is created during the settlor’s lifetime but the provisions can be altered or can celed–or the trust can even be terminated-by the sertlor (referred to in this context as the “grantor..). During the life of the trust, income earned is distributed and taxed to the grantor.5’7 and it is only after the death of the grant or that property is transferred to the other beneficiaries.

Essentia11y, the grant.or creates the living trust to help himself or herself during his or her lifetime. and then to help other beneficiaries after he or she dies. The trust also helps the grantor solve certain est.ate and probate problems. Finally, it may help the grantor achieve other commendable goals while he or she is alive and able to enjoy the trust benefits. However, because of the doctrine of merger,;,8 the grantor cannot be the sole beneficiary of the trust.59 For this reason, the trust has other beneficiaries besides the grantor. Not only that, but the trust agreement must also be carefully worded so that the trust purpose reflects a purpose beyond providing solely for the grantor.

All things considered, a Texas living trust is also a contract to manage the grantor’s assets and protect the grantor if he or she becomes disabled. The living trust can be either revocable or irrevocable. As an estate planning tool, however, the revocable living trust has become very popular. The remainder of our discussion of the living trust will focus on this type of will substitute-the revocable living trust. We note from the onset that because the living trust is both revocable and amendable, the grantor can change it when he or she needs to.

9-3:1.1 Parties to the Revocable Living Trust

A revocable living trust has four important parties and one group of parties. These a11 interact in the best interests of the grantor. First, we have the grantor. the trustee, and the primary beneficiary. These are rea1ly the same person. Next comes the successor trustee. Third comes the remainder beneficiaries. \Ve shall discuss the role of each of these in turn.

9-3:1. la      The Grantor

The grantor establishes the trust, provides assets to the trust, and determines the trust’s goals.00The grantor has the power to revoke or amend a living trust-unless he or she gives up that right when the trust is first created.61 We note that this language is somewhat unique to Texas because unlike what prevails in most states, all trusts are presumed revocable in Texas.62

9-3:1.1 b The Trustee

The trustee manages the trust and its assets on a daily basis.63 In a revocable living trust, the grantor is also the trustee. He or she serves as the legal owner and manager of a11 the trust assets.

9-3:1.1c The Successor or Contingent Trustee

Upon the death of the grantor, the trust becomes irrevocable. That the trust may con­ tinue to function, the trust, at fl1e time of its creation, names a successor or contingent trustee. Upon the death of the grantor (and original trustee), this successor trustee now succeeds to the office of trustee and administers the trust pursuant to its terms.c.>1

The  successor or contingent trustee also succeeds to the trusteeship in the event the grantor-trustee suffers a disability and is no longer able to function as trustee of the revocable living trust.65

9-3:1.ld               The Primary Beneficiary

ll1e primary beneficiary receives the income and other present interests of the trust. Typically, the grantor is the primary beneficiary. He or she receives trust income du1ing life. along with other lifetime benefits from the trust. Moreover, the grantor, as primary beneficiary. has access to the trust corpus and to the use of the trust’s other assets such a:s his or her home, car, and other personal property.66

9-3:1.1e The Remainder Beneficiaries

A second set of beneficiaries, the remainder beneficiaries, receive no benefits from the trust until the grantor-trustee-primary beneficiary dies. They must be patient and wait to receive their trust benefits.

Upon the death of the grantor-trustee-primary beneficiary, the successor trustee begins to administer the trust pursuant to the terms laid out in the trust instrument. In most instances, this merely entails distributing the trust assets to the designated remainder beneficiaries.

9-3:1.2  Funding the Living Trust

Long before the successor u·ustee gets to distribute trust assets, however, the grantor needs to fund the trust. Funding the trust entails transferring ownership of assets from the grantor to the living trust.67 The grantor must physically change the titles of assets owned from his or her name (or joint names, if married) to the trustee of the living trust. The grantor must also change the beneficiaries’ designations on life insur­ ance, retirement assets, and other types of assets to the trustee. Of course, because the grantor is also the trustee, the change in ownership will not have any adverse effect on the grantor.

It is very important that the grantor funds the revocable living trust. Failure to do so will mean that upon the grantor’s death, nothing will be in the trust and the entire estate will have to go through probate. IJ probate minimization was one of the grant­ or’s goals in creating the living trust, his or her failure to fund the trust would have defeated that goal. The time, effort, and money he and she expended on establishing the trust could have been spent doing something else.

9-3:1.3 The Pour-Over Will

To accompany a revocable living trust, the grantor must execute a pour-over will. This will causes any forgotten or recently acquired assets to be transferred into the living trust at the grantor’s death. While this does not necessarily avoid probate, it at least ensures the assets will pass under the revocable living trust and in accordance with the grantor’s wishes.

9-3:1.4 Functions of the Revocable Living Trust

The revocable living trust serves a variety of purposes for the elderly individual. As an initial matter, the individual needs to carefully examine his or her life circumstances to determine whether it would be to his or her advantage to create a revocable living trust. It would be a mistake for an elderly person to create a revocable living trust simply because “all” of his or her friends have one. After all, what works for the friends may not work for this particular elderly person. vYhat each elderly person must do is study the general functions of revocable living trusts and determine which of these are applicable to his or her life situation. Following are some of the important func­ tions of revocable living trusts.

9-3:l.4a Minimizing Probate

Many estate planners and financial consultants tout the revocable living trust as a tool for avoiding probate. That may not necessarily be true; it. would be better to view the revocable living trust as a tool to minimize probate. lf in the process one is able to avoid probate, all the better.

After the individual has created the revocable living trust, he or she funds it by transferring all of his or her assets into it. These assets are not part of the probate estate upon the grantor’s death. ‘n1e property remaining in the trust. when the grantor dies is administered and distributed according to the terms of the trust; it does not pass under the grantor’s Last \Viii and Testament or by intestate succession. However, any assets that are somehow not transferred into the trust are not subject to trust administration. Should the grantor die at a time that these assets are still not part of the trust, they shall be subject to probate. The same is true of any assets the grantor acquired after he or she created the trust but fajled to transfer into the trust.

Generally, advantages to avoiding or minimizing probate include getting the prop­ erty into the hands of the beneficiaries quickly, avoiding gaps in management, and avoiding publicity. However, probate in Texas is often simpler and less expensive than its general reputation would lead someone to believe. Tirnt being the case, the elderly person should think carefully about the choice he or she should make: the Last \Vill and Testament or the revocable living trust. The at1orney consulted about the matter should be honest and counsel the client about his or her possible choices in light of the assets the client owns and the goals he or she wishes to achieve through his or her estate plan.

9-3:1.4b Avoiding Probate of the Homestead

\Vhile the revocable living trust can be used as a tool to minimize or avoid probate in almost. all cases, it is a definite method available for avoiding probate of the home­ stead. A living trust of this type is distinguishable from other kinds of land trusts such as a pure anonymity/ asset protection trust that has no probate objectives, or an inves­ tor trust that contemplates short-term acquisition of investment property or a transfer of underlying ownership by means of an assignment of beneficial interest.

A middle class elderly individual living in Texas should give serious consider­ ation to creating a revocable living trust-to use with the accompanying pour-over will-as a means of probate avoidance of the homestead. We note that because Texas

homesteads are already protected from forced sales to satisfy judgments,68 the empha­ sis is on probate avoidance, not asset protection.

9-3:1.4b1 Creating the Trust

l11is type of trust can be created through a three-part process: (1) establishing the trust with a signed trust agreement, (2) executing and filing a warranty deed convey­ ing the home into the trust, and (3) executing a pour-over will to move miscellaneous assets into the trust upon the grantor’s death.69

As with other trusts, a grnntor creates the trust and transfers property into it.70 A trustee (or co-trustees if the  trust is being created by a married couple) is appointed to direct trust affairs on behalf of the beneficiaries (again, usually the spouses) and, upon the death of the last beneficiary, on behalf of one or more contingent beneficia­ ries (usually the couple’s children). Since title remains in the trust, and the trust does not die, the surviving beneficiaries “inherit” the trust property but without probate or other involvement by courts or lawyers. All that changes are the percentage beneficial interests in the trust, and this occurs automatically.

9-3:l.4b2  Preserving the Homestead Tax Exemption

Real property is conveyed into trust by general or special warranty deed recorded in the County Clerk’s real property records. The deed should make certain specific recitals concerning the homestead nature of the property. Conveying the proper·ty by deed into the living trust is an essential part of the process since the trust agreement, by itself, does not transfer title.

To preserve the homestead tax exemption, the trust agreement should contain language that preserves (1) homestead protections available to the grantor pursu­ ant to the Texas Constitution,71 and the Texas Property Code;72 and (2) any available homestead tax exemption, whether currently on file or not. It is prudent to make these express recitals in the trust agreement even though Texas Property Code Sec­ tion 41.0021 states that transfer of a residence into a “qualifying trust” (i.e.. a revoca­ ble living trust) retafos the homestead character of the property.n Similar language should also be recited in the deed transferred into trust so as to make it clear to the local taxing authorities that a living trust has been established for the homestead.

9-3:l.4c Protecting the Grantor and His or Her Assets

When an elderly person establishes a revocable living trust, he or she is cypica11y both the beneficiary and the trustee. As time passes by, though, the grantor may want someone else to be trustee. By then, he or she may be disabled, maybe his or her spouse has died, maybe he or she has made plans to travel in his or her “old age,” or

maybe he or she is just tired. ‘Whatever the reason, the grantor-trustee wants to take a break.

Because the grantor-trustee would have chosen someone he or she trusts as the successor or contingent trustee, he or she can call on that person to take over the management of the trust. Management of the grantor’s assets would then continue uninterrupted. Investments would continue without interruption: payments would be made on time: expenses would be managed; medical bills would be paid: the grant­ or’s health care would be provided for continuously. Everything concerning the trust would continue as if the grantor were still in charge.

Accordingly, the revocable living trust would continue to protect the grantor and his or her assets.

9-3:1.4d Providing for the Grantor’s Beneficiaries

A revocable living trust can be written so that part of it mimics a Last ·will and Testa­ ment. It caJ1 contain instructions for the distribution of the grantor’s assets after he or she dies. In this way, it can provide benefits to the grantor’s heirs. Not only that, but the grantor can also choose to provide benefits to someone while the grantor is still alive! Indeed, with a revocable living trust, the grantor has much flexibility and can direct his or her giving so that his or her funds will go to be used by the beneficiaries he or she most cares about and the causes that for him or her matter most.

9-3:1.5 Negative Aspects of the Revocable Living Trust

Notwithstanding the beneficial aspects of the revocable living trust, an elderly person considering executing one must also consider the negative aspects. The following sections present four such negative aspects.

9-3:1.Sa Cost

A ful1y-funded revocable living trust requires the grantor to transfer ownership of his or her assets out of his or her name into that of the trust. The attorney must draw up new deeds for property being transferred into the trust; new title must be acquired for these properties. Ownership of trust assets must be registered with the trust itself. All of this costs money. Accordingly, the elderly person desiring to create a revocable living trust must ensure that he or she has the funds to expend on the project. Having just enough money to pay the attorney to draft the trust instrument will do little good; if this is the case, the potential grantor wi11 eventually die and his or her heirs will dis­ cover that lhe trust was not effective and the decedent’s estate is subject to probate, after all.

9-3:1.Sb Constant Attention

As trustee of his or her revocable living trust, the elderly person must deal with the trust regularly throughout the rest of his or her life. ‘Whenever he or she wants money, he or she must deal with the trust. \\Thenever he or she wants to acquire or sell an asset, he or she must deal with the trust·.whenever he or she receives income, he or she must deal with the trust. Wl1ile these duties are not too different from going about managing life without a trust-that is, doing things like balancing a check book,

paying bills, and making investment decisions-for an elderly person who is not sawy about these matters or who is not as “sharp” as he or she was in previous years, fulfill­ ing these duties could be problematical.

9-3:1.Sc Probate Still Possible

One of the best reasons for establishing a revocable living trust is to minimize-if not eliminate-probate. However, the trust will succeed in doing that only if it owns all of the grantor’s assets when he or she dies. If so much as a single stock certificate, single bank account, or single parcel of real estate remains out of the trust at the time of the grantor’s death, this portion of the estate will have to go through the probate process. It is important, therefore, that the trust instrument be well drafted, the trust be well funded, and that the pour-over will be well written so that upon the grantor’s death, any of his or her assets that are not in the trust will be transferred therein by the pour­ over will, thereby minimizing-or even avoidling-probate.

9-3:1.5d No Transfer Tax Savings

The revocable living trust is not designed to save on federal transfer taxes-that is, the estate, gift, and generation transfer skipping taJCes. People with large estates desir­ ing to save on transfer taJCes should look to other trust instruments and estate plan­ ning techniques for relief. The truth is, a revocable living trust will not give a taxpayer any greater tax savings than he or she is already entilled to receive.

9-3:1.6 Revoking a Revocable Living Trust

Most revocable living trusts meet their end automatically, as scheduled by the trust’s creators in the trust instrument, sometime after the grantor or granters have died.74 Even after the event of termination (such as the grantor’s death) has occurred or the period of time for the trust’s existence (such as until the grantor’s children reach the age of majority) has elapsed, the successor trustee may continue to exercise the pow­ ers of trustee for a reasonable period of time required to wind up the affairs of the trust and to distribute the assets to the appropriate benefkiaries.75 1l1e fact that the successor trustee continues to exercise trustee’s powers at this point does not in any way affect the vested rights of the beneficiaries of the trust.76

That being said, it is possible that the grantor-trustee-beneficiary may want to revoke the trust prior to his or her death. Texas law provides that a grantor may revoke a trust unless the trust is irrevocable by the express terms of the instrument creating it or of an instrument modifying it.77 However, this power to revoke carries one caveat: If the trust was created by a written instrument, the revocation must also be in writing.78

If a granter is authorized to revoke the trust, after executing the document effect­ ing the revocation, the individual must “un-fund” the trust-take the trust’s name off

his or her assets, or re-transfer the assets from the trust to himself or herself. This may be a lengthy process, but it must be done.

9-3:2 Charitable Trusts

As people age, they think increasingly about the blessings they have received in life and about the charitable organizations that have helped them along life’s jour­ ney. Among these organizations are churches, mosques, synagogues, health organ­ izations, educational institutions, civic organizations, and fraternal beneficiary socie­ ties. Unless these organizations are denied tax exemption under Internal Revenue Code Section 502 or 503, the Internal Revenue Code exempts them from income tax­ ation.79 Subject to certain annual percentage limitations, the Code allows taxpayers to deduct the value of contributions made to these organizations from their adjusted gross income for purposes of determining their federal income taxes due each year.80 The Code also allows taxpayers to make inter vivos transfers to these organizations without any gift tax consequences,81 and testamentary transfers without any estate tax consequences.82 Because Texas does not impose gift, estate, or inheritance taxes on gratuitous transfers, Texas law does not apply to these exemptions.

Keeping the federal exemptions in mind, then, an elderly person has various meth­ ods available for making gifts to charitable organizations. TI1e person could make:

  1. gifts of cash (which makes valuation quite easy);
  2. gifts of personal property;
  3. gifts of real property;
  4. gifts of life insurance; and
  5. gifts in trust.

The person would have various options for making charitable gifts in trust Follow­ ing is a discussion of these.

9-3:2.1 The Pooled Income Fund

A pooled income fund is a charitable trust established and maintained by a qualified non-profit organization (commonly called a Section 501(c)(3) organization).53 ·when an individual donates funds to the charitable organization, he or she effectively trans­ fers an irrevocable remainder interest to the charity, and retains an income stream for life.81 The organization then pools all donations received from various donors and invests them, providing each donor and his or her beneficiaries with a lifetime income stream based on a prorated share of the income earned by the fund.85 The Code does not provide for any exemption from income tax for this income.

However. the donor receives certain tax benefits for making this charitable contri­ bution. As an initial matter. in the year the donor makes the contribution to the fund, he or she receives an income tax deduction for the value of the remainder interest of the gift (calculated using figures provided by the Internal Revenue Service [IRS]). ; Upon the donor’s death. the fund keeps the principal (or remainder interest). By then, though. the donor might have earned the entire value of this interest back as invest­ ment income, without any of it showing up in his or her estate at death, where it would have been subjected to the higher estate tax rates.

9-3:2.2 Charitable Remainder Trust

For the individual who wants to create his or her own charitable trust, and who wants to make a substantial gift to charity, the charitable remainder trust might be a better option.

9-3:2.2a Definition

Generally, a charitable remainder trust (CRT) is a trust that provides for a specified distribution of income, at least annually, to one or more beneficiaries-at. least one of

,, hich is not a charitable organization-for life or for a term of years, with an irrevoca­ ble remainder interest being held for the benefit of, or to be paid over to, one or more charitable organizations.87 For the sake of simplicity, we shall address this issue here as if the remainder interest goes to only one charitable organization.

It is important to note that the trust is irrevocable. Once the trust has been estab­ lished. the grantor cannot change his or her mind. l11ere is no turning back.

9-3:2.2b  Establishing the Charitable Ren-iainder Trust

An individual wishing to establish a CRT must first establish an irrevocable trust and transfer into it the property he or she wishes to donate to the charitable organization. To maximize his or her benefit from the transaction, the grantor should transfer an appreciated asset-such as stock or highly appreciated real estate-into the trust. Of course. the grantor must ensure that the charitable organization is one recognized as such by the IRS. Generally, this means that the organization must be exempt from paying taxes.68

By establishing the trust in this manner, the grantor removes the asset from his or her estate, thereby ensuring that the estate will not be liable for estate taxes on account of the asset upon his or her death. Meanwhile, after the charitable trust receives the asset, the trustee will sell it at full market value, will pay no capital gains tax on the proceeds,ro and will then re-invest the proceeds in income-producing assets. The trustee will then pay this income to the grantor and/or any other beneficiaries named in the trust instrument (making such payments at least annually), with such

payments continuing either for a term of years not to exceed 20 years or for the life of the grantor.90

The grantor must give careful consideration to the question who should serve as trustee of the CRT. Choices include the grantor, the charity, a corporate trustee. or someone else. The trustee is charged with the duty of investing, protecting, and man­ aging the trust assets. As we have already stated, each year the trustee will pay the grantor or the named income beneficiary or beneficiaries a portion of the income that the trust fund accumulates. These payments will last for a set number of years (not to exceed 20), or for the remainder of the grantor’s life.91 The trust will end at the time of the grantor’s death. at which time the corpus (i.e., the remainder interest) will vest in the charitable organization.92

9-3:2.2c Tax Advantages of the Charitable Remainder Trust

In addition to allowing the grantor to donate to a charitable organization of his or her choice, a CRT provides him or her with three distinct tax benefits.

First, after the grantor has established the CRT and donated property to the charita­ ble organization. he or she has the option to take an income tax deduction on account of the remainder portion of the donation, which is the true .gift to the charitable organ­ ization.93 However, the grantor does not receive a dollar-for-dollar deduction; instead, the IRS calculates the total income tax deduction based on the valuation tables of Internal Revenue Code Section 7520.91

Second, because the property the grantor transferred to the trust will go to a char­ itable organization upon his or her death, its value will not be included in his or her estate for purposes of determining the federal estate tax due, if any.9

Third, and last. a charitable trust allows a grantor to turn property that is not pro­ ducing income into cash without paying taxes on any profits gained. For example, if Darby held 5,000 shares of stock that had appreciated in value from $10 a share to $75 a share in the years that she held it, she could sell the stock and pay capital gains tax on the $65 gain per share. However, if Darby donates the stock to a charitable trust, the trust can sell the stock and not pay any tax on the sale. Not only that, but Darby’s charity can also sell the $375,000 worth of stock, invest the money in a mutual fund, and pay Darby the interest from this fund for the rest of her life, all without capital gains tax. If Darby had chosen to sell the $375,000 worth of shares herself, she would have had to pay capital gains tax on the proceeds.

9-3:2.2d Types of Income From the Charitable Remainder Trust

When the individual establishes the CRT, he or she will have a choice between two different ways of receiving income from the fund. TI1e choices result in the existence

of two types of CRTs-the Charitable Annuity Remainder Trust (CRAn and the Char­ itable Remainder Unitrust (CRUl).

9-3:2.2d1 Charitable Re1nainder Annuity Trust

A granter can opt to receive income in the form of a fixed annuity. Under this option. he or she will receive a fixed dollar amount from the trust each year. 111e granter can choose to receive these payments for a term of years not to exceed 20 years, or for the rest of his or her life.96 Regardless whether the trust has a bad year and ends up losing money, the granter will still receive the fixed dollar amount from the trust each year.

9-3:2.2d2 Charitable Re1nainder Unitrust

Another option for income payments is for the granter to set up his or her annual pay­ ment as a percentage of the current value of the trust. No matter how much the trust made or lost in a particular year, the grantor (or a named beneficiary or beneficiaries) will receive the same percentage share each year. The percentage must be at least 5% of the trust’s value, but no more than 50% thereof.97

9-3:2.3 The Charitable Lead Trust

In many ways, the Charitable Lead Trust (CLl) is the exact opposite of the CRT. Yet, though the mechanisms may be different, the goals are somewhat similar.

9-3:2.3a Definition

In a CLT, a grantor makes a gift to a charitable organization. The charity keeps the income instead of paying it to the grantor or his or her beneficiaries.98 However. when the trust ends, the original gift amount is returned to the grantor or his or her heirs.

The grantor benefits by getting an income tax deduction each year the trust is in effect.99

‘vVe have aJready noted that the mechanisms of the CRT and the CLT are different. Indeed, the rules governing the two are so different that whereas there are two types of CRTs, there are four types of CLTs:

  1. Qualified Reversionary Grantor Trust;
  2. Qualified  Nonreversionary Granter Trust;
  • Qualified Nonreversionary Nongrantor Trust; and
  • Qualified Reversionary Nongrantor Trust.

Each type of trust produces different tax benefits that can be matched with the donor’s personal and philanthropic planning objectives.

9-3:2.3al Qualified Reversionary Grantor Charitable Lead Trust

Qualified reversionary grantor CLTs are created during the life of the donor for the purpose of paying an income interest to charity for a term defined in the trust instru­ ment, after which the remainder interest reverts to the grantor.

Granto rs creating grantor CLTs receive a charitable contribution income tax deduc­ tion in the year the trust is created for an amount equal to the net present value of the income interest passing to charity. To qualify for income tax deduction purposes, the granter must be treated as the owner of the trust’s income under the grantor trust rules of 26 U.S.C. §§ 671-678. Accordingly, all income produced by the trust during the trust term, including amounts distributed to charity, is taxable to the granter. On conclusion of the measuring term. the trust assets revert to the granter or to the grantor’s estate.

Qualified reversionary grantor CLTs are particularly useful for donors who desire to make a multi-year charitable pledge and accelerate the charitable deductions-that would otherwise be produced over the pledge period-into the first year.

9-3:2.3a2 Qualified Nonreversionary Grantor Charitable Lead Trust

The qualified nonreversionary granter CLT is a more recently approved variation of the CLT that produces both income and gift tax deductions. Simply stated, it is similar to a nongrantor nonreversionary lead trust in that it qualifies for a charitable gift tax deduction; however, it contains an intentional drafting defect (i.e., a right held by the granter or non-adverse party to the grantor to re-acquire trust property by substitut­ ing other property of equivalent value) that causes the granter to be considered as the owner of the trust’s income. TI1is latter component also qualifies the transfer for charitable income tax deduction purposes.

Provided the granter does not retain any rights that would otherwise cause the gift to be considered incomplete for gift tax purposes, the taxable transfer to the heirs becomes cmnplete when the trust is established. Further, assuming the granter retains no estate tax interests or strings, no portion of the trust is includible in the grantor’s estate.

9-3:2.3a3 Qualified Nonreversionary Nongrantor Charitable Lead Trust

Qualified nonreversionary nongrantor CLTs are created for the purpose of paying an income interest to charity for a defined measuring term with the remainder interest transferred to one or more non-charitable beneficiaries named in the trust instrument.

l11e grantor’s children and grandchildren are the most frequently named beneficia­ ries of these types of trusts.

As its name suggests, a non-grantor trust does not qualify under grantor trust rules: accordingly. the grantor does not receive a charitable income lax deduction. However. none of the income produced by the trust is taxable to the grantor. A quali­ fied nongrantor CLT is taxed as a complex trust.

If the non-grantor trust is created on an inter vivos basis, the grantor receives a gift tax charitable deduction in an amount equal to the net present value of annuity or uni­ trust income interest payable to charity. If the trust is created on a testamentary basis. the grantor’s estate receives an estate tax charitable deduction, also based on the net present value of the income interest. Depending on the combination of the measuring term and income amount payable to the charity, it is possible to produce a charitable gift or estate tax deduction that equals the amount transferred, thereby creating a gift and estate tax-free transfer.

A grantor can also utilize a Nonreversionary Nongrantor CLT to leverage the generation-skipping transfer tax exemption for transfers to grandchildren and other skip persons. The benefits of wealth transfer can be amplified by funding the trust with assets that qualify for valuation discounts such as units in family limited partner­ ships and other types of minority fractional interests in property.

9-3:2.3a4 Nonqualified Nongrantor Reversionary Charitable Lead Trust

In order to qualify for income, gift, and estate tax deduction purposes, a CLT must pay a guaranteed annuity or unitrust amount. Nonqualified CLTs are designed to violate this rule and, therefore, produce no income, gift, or estate tax deductions. Gift and estate tax deductions are immaterial because the trust will revert to the grantor. The trust will. however, be able to claim gift tax deductions for income amounts trans­ ferred to charity as they occur.

\\’hat is important to th.ese types of trusts is the fact that although no income tax deduction is available, neither is any of the trust’s income taxable to the gr an tor. These trusts are taxable as complex trusts for which they can claim a deduction against their taxable income for amounts distributed to charity.

9-3:2.4 Texas law on Charitable Trusts

ln Texas, the attorney general has standing to enforce charitable trusts.1c;’ To increase the likelihood that the attorney general is aware of lawsuits involving charitable trusts, Texas law requires that the party initiating the action give notice to the attorney gen­ eral.101 This notice must be given by certified or registered mail within 30 days of fiJing, but not less Lhan 25 days before a hearing, and must include a copy of the peti­ tion.102 The Texas Property Code provides an extensive Jist of proceedings to which the attorney general is entitled to notice.103

If the attorney general does not receive notice, any judgment or settlement is voidable-that is, the attorney general may set aside any judgment or settlement at any time. TI1e attorney general needs no grounds other than that he or she did not receive notice.101

Texas gives a broad definition to the term “charitable trust.” In addition to tradi­ tional charitable trusts, the term encompasses any inter vivos or testamentary gift to a charitable entity.105 ‘n1e term “charitable trust” also includes any charitable entity, even if it is not run as a trust.106

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chapter pdf

  1. Federal Deposit Insurance Corporation. “Revocable and Irrevocable Trust Accounts.”, “Revocable Trust Accounts (12 C.F.R. § 330.10)“, “Irrevocable Trust Accounts (12 C.F.R. § 330.13)“, Department of Justice. “Handbook For Chapter 7 Trustees Forms and Instructions.” ↩︎
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Wills

Wills

Chapter 251  Fundamental Requirements and Provisions Relating to Wills

Sections

251.001 Who May Execute Will

251.002 Interests that May Pass by Will

251.051 Written, Signed, and Attested

251.052 Exception for Holographic Wills

251.053 Exception for Foreign and Certain Other Wills

251.101 Self-proved Will

251.102 Probate and Treatment of Self-proved Will

251.103 Period for Making Attested Wills Self-proved

251.104 Requirements for Self-proving Affidavit

251.105 Effect of Signature on Self-proving Affidavit

251.106 Contest, Revocation, or Amendment of Self-proved Will

251.107 Self-proved Holographic Will

251.1045 Simultaneous Execution, Attestation, and Self-proving

Introduction

For an elderly person, having a L1st Will and Testament should be as common as hav­

ing a checking account. Just as the elderly person opens a checking account because it is secure and convenient, he or she should have a Last ,vm and Testament for the

same reasons. Yet, thousands of Texans avoid making a Last Will and Testament. Why?

It is important that the Elder Law attorney understand why his or her clients-or potential clients-are reluctant to execute a Last \iVill and Testament. Following are four possible reasons for this reluctance:

  1. A will reminds people of their mortality.
    1. A will reminds people that their personal and financial affairs are not in order, something they do not want others to know about.
    1. A will makes people deal with a lawyer, an experience many people would rather avoid.
    1. A will costs money.

Understanding why people are reluctant to execute their wills may lead the Elder Law attorney to help them understand and appreciate the benefits of preparing a Last Will and Testament. Among these benefits are the following:

  1. The elderly person will get to choose his or her beneficiaries. I.n the absence of a will, Texas law will determine who takes the elderly person’s assets when he or she dies. Usually, the heirs at law are not the same as the ones the decedent would choose in his or her will.
  2. The beneficiaries will save time and money. If an elderly person has no will, his or her estate is more likely to go through a complex, expensive, and intrusive legal process to determine how the estate will be distributed and creditors will be paid. Planning for a will gives the elderly person the opportunity to organize all documents and everything else related to the estate.
  3. TI1e elderly person can reduce taxes. If the estate is large, it could be subject to federal transfer taxes. ll1rough a Last Will and Testament, someone is able to make certain legal and ethical transfers that would reduce that tax burden.

169

  • 171rough the Last\\ ill and Testament, the elderly person can show his or her family just how much he or she cares about them. Having a will simplifies life for the person’s survivors, telling them who gets what assets and appointing someone to administer his or her affairs.

All things considered. the benefits of having a Last Will and Testament by far out­ weigh the negatjves. It behooves every elderly person to retain the services of an attorney to prepare, draft, and supervise the execution of a Last \ ‘ill and Testament before such person’s eyes close in death.

Intestacy-An Estate Plan by Default (and Something to Avoid)

\.\’hen a Texan dies without a valid will or dies with a valid will that does not encom­ pass all of the person’s probate estate, the person’s probate property that is not cov­ ered by a valid will is distributed through a process called intestate succession. l11e intestate distribution scheme in Texas is dependent on both the type of property (i.e., real or personal) and the marital status of the decedent For purposes of this chapter, we shall assume that the decedent died after September 1, 1993, which was the date on which these distinctions took effect.1

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Fundamental Requirements and Provisions Relating to Texas Wills

A1though not required to do so, the Texas Legislature has granted individuals the privilege of designating the recipients of their property upon death. Because the abil­ ity to execute a will is a privilege, a will has no effect unless the testator has precisely followed all the requirements. Texas demands strict compliance with the statutorily mandated requirements.21 A validly executed Texas will must adhere to the following four main requirements: (1) the testator had legal capacity/2 (2) the testator had tes­ tamentary capacity,23 (3) the testator displayed testamentary intent/ and (4) the will execution ceremony adhered to the requisite formalities.25

:1 Will Formation

A testator must possess both legal and testamentary capacity in order to execute a will.

The testator has legal capacity if he or she is (1) age 18 or older, (2) currently or previously married, or (3) a current member of the armed forces of the United States.26

A testator has testamentary capacity (i.e., “sound mind”) if he or she has (1) suffi­ cient mental ability to understand the act in which the testator was engaged, (2) suf­ ficient mental ability to understand the effect of making a wi1l (i.e., to dispose of prop­ erty upon death), (3) sufficient mental ability to understand the general nature and extent of the testator’s property, (4) sufficient mental ability to know the testator’s next of kin and the natural objects of the testator’s bounty and their claims upon the testator, and (5) memory sufficient to collect in the testator’s mind the elements of the business to be transacted and to hold them long enough to perceive at least their obvious relation to each other and to form a reasonable judgment as to them.27

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TEX. PROB.CODE ANN. § 59(b) (emphasis supplied). Nowhere in this section, or any other, is there any mention of “substantial compliance” with the attesting signature requirements of the will itself contained in section 59(a). Further, no self-proving affidavits were offered in this case.

None of the cases cited by Schoenwandt stand for the principle that “substantial compliance” is sufficient for the attesting witness requirement of a written nonholographic will not accompanied by a self-proving affidavit.

“[I] nfluence is not undue unless the free agency of the testator was destroyed and a testament produced that expresses the will of the one exerting the influence.”- in Matter of Kam, 2016

Undue influence implies the existence of a testamentary capacity subjected to and controlled by a dominant influence or power.- in IN RE ESTATE OF RUSSEY, 2019

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– in IN RE ESTATE OF RUSSEY, 2019

:2 Will Requirements

The requirements for a valid Last Will and Testament are laid out in the Texas Estates Code. The Code first sets forth the formalities for attested wi11s, and then makes exceptions for two other types of wills-holographic wills and foreign wills.

:2.1 Attested Wills

Generally, the formalities for attested wills are found in Texas Estates Code§ 251.051.

:2. la  In Writing

Texas law provides that a valid Last Will and Testament must be in writing.28 The statute does not indicate what the will is to be written on or written with. However, we note that Texas law defines written to include “any representation of words, letters, symbols or figures.”29

8-3:2.1b Signed by the Testator

To be valid, the Last vVill and Testament must be signed either by the testator in person or by a proxy provided the signature is placed on the will (1) by the testator’s direction and (2) in the testator’s presence.30

Texas law defines a “signature” as any symbol executed or adopted by a person with present intent to authenticate a writing.31 This is very beneficial for the elderly, because pursuant to the law, initials, marks, and nicknames are sufficient to serve as signatures.

Another aspect of the law that benefits the elderly allows a notary to sign a wi11 a a proxy for a testator who, because of a physical disability, is unable to sign his or he1 own Last Will and Testament.32

As regards the placement of the signature, the Estates Code is silent. Although the testator normally places it at the end of the instrument, nothing in the law makes that requirement33

8-3:2.lc Attested by At Least Two Witnesses

Texas law requires that a will must be witnessed by two or more credible witnesses.34 By “credible,” the law means that the witness must be competent to testify in court under the applicable evidence rules.35 The witnesses only need to be above the age of 14.36

The witnesses do not need to know they are witnessing a will. ln other words, pub­ lication is not required in Texas.Ji 111e witnesses only need to have the intent to give validity to the document as an act of the testator.

1l1e witnesses must attest using ”their names” in “their own handwriting.”38 Accord­ ingly. artestation by mark or by proxy is not allowed.

Although the stah1te states that the witnesses must “subscribe” (i.e., attest at the end o( the will). Texas courts have not read this requirement strictly.39

111e witnesses must attest “in the testator’s prcsence.”·10 The courts have inter­ preted this to mean a conscious presence, which means that “the attestation must occur where [the) testator, unless blind, is able to see it from his actual position at the time. or at most. from such position as slightly altered, where he has the power readily to make the alteration without assistance.”41 ‘vVe note that unlike many other states. Texas law does not require (1) the witnesses to attest in each other’s p·resence or (2) the testator to sign the will in the presence of the witnesses.

Although the testator should sign the will before the witnesses attest, Texas courts have not been strict in that regard. lnstead, they have followed the continuous transac­ tion view so that as long as “the execution and attestation of a will occurs at the same time and place and forms part of one transaction, it is immaterial that the witnesses subscribe before the testator signs.” 2

8-3:2.2 Exception for Holographic Wills

A holographic will is prepared in the testator’s own handwriting.431l1e Code exempts holographic wills from the attestation requirements.H

The will must be wholly in the testator’s handwriting.’15 However, Texas courts have adopted the surplusage approach. This means that non-holographic material will not injure the holographic character of the will so long as the non-holographic material is not necessary to complete the instrument and does not affect its meaning.·16

A holographic will may be made self-proved.47 Because the self-proving affidavit is a separate instrument, it does not need to be holographic.

J:2.3 Exception for Foreign Wills

Effectjve September 1, 2015, Texas created an exception for wills executed outside of the state. According to this exception, a will is valid in Texas, even if it does not meet the Texas requirements, if it meets the requirements of the jurisdiction where (1) lhe will was executed, (2) the decedent was domiciled. or (3) the decedent had a place of residence.·18

:3 Self-Proved Wills

A Texas testator has the option of making his or her will seU-proved by either (1) add­ ing an affidavit as a separate document attached to the will49 or (2) including the af fida­ vit within the text of the attestation and execution clauses of the will.jl) In practicality, a11 Texas wi11s should contain this affidavit because it substitutes for the in-court tes­ timony of the witnesses when the will is probated, thereby saving time and expense. A sample Self-Proving Affidavit is included in this text as Appendix 9A Appendix 9B presents a sample Simultaneous Execution, Attestation, and Self-Proving Will clause.

Valuable Options

In drafting wills for the elderly, the Elder Law attorney must consider several options.

\1/hatever options he or she chooses, the overriding goal will be to enable the smooth transfer of assets from the decedent’s estate to the decedent’s beneficiaries. With this in mind. the attorney should be wi11ing to take advantage of the options discussed below, a11 provided under Texas law.

:1 Independent Administration

Texas law provides that any testator may provide for the independent adrrunistration of his or her estate.’1 In fact, independent administrations are quite common in Texas because they are faster. economical, and more convenient than court-supervised (i.e., dependent) administration. Once the personal representative files the inventory. appraisement, and list of claims, the personal representative administers the estate without court involvement.

Independent administration is possible under three conditions. First, the testator’s wi11 may expressly authorize independent administration.52 Although no special lan­ guage is needed, most attorneys track the statutory language as fo11ows:

I appoint [NAME OF INDEPENDENT EXECUTOR] as Independent Executor. I direct that there sha11 be no action in the probate court in the settlement of my estate other than the probating and recording of this Last Will and Testament, and the return of any inventory, appraisement, and list of claims of my estate.53

K

Second, if the testator did not specify the executor to be independent, all of the beneficiaries may agree to have independent administration.51 However, if the will expressly forbids independent administration, the court will not authorize it.55

l11ird. if the decedent dies intestate, the heirs may agree to an independent admin­ istration.56

:2 Waiver of Bond

In Texas, personal representatives must post bond unless one of the following excep­ tions applies:

  1. The testator waived bond in the testator_,s will.57
  2. A corporate fiduciary is serving as the personal representative.55
  3. The court waives bond for an independent executor.59

l11e bond must be paid from the estate’s assets. Accordingly, it is very common for a testator to waive bond in the will to save the estate-and hence the beneficiaries­ the cost of the bond.

8-4:3 Carefully Identify Beneficiaries

\Vriting a wilt allows someone to name his or her beneficiaries. He or she can include­ or exclude-whomever he or she likes. No legal requirement exists that the testator names anyone as a beneficiary. No one has the right to demand to be included in another’s will; the choice is entirely up to the testator.

In writing the will, then, the best approach is to identify each beneficiary by name.

If necessary, use middle names to distinguish the beneficiaries.

Sometimes, identify beneficiaries by class-“the children of … ” or ”the issue of….”If such is the case, it does not hurt to identify the members of the class.

8-4:4 Excluding People From the Will

The law gives the testator the absolute right to select the beneficiaries of his or her estate. Conversely, it does not give anyone the right to demand to be a beneficiary. However, the elderly are often susceptible to the undue influence of unscrupulous persons. How does the attorney protect the elderly client?

8-4:4.1  Disinheritance

The first path open to the attorney is to counsel the client to disinherit certain relatives if the client is so inclined. To disinherit a relative, the testator should do the following:

  1. First, acknowledge the existence of the relative. By so doing, the testator ensures that the disinherited relative cannot claim that he or she was acciden­ tally forgotten out of the will.
  2. Second, directly state in the will that “no gift is being left, or other provision being made” for that person. Accordingly, that person inherits nothing under the terms of the will. If perchance the Texas laws of intestate distribution direct that this person should take a part of the testator’s intestate estate-should any part of the testator’s estate pass through intestacy, the person will receive nothing.
  3. Third, the will should include a “No Contest Clause.” This clause states that any person who attempts to contest the will would lose whatever bequest he or she may have otherwise received. It should also say that if a court. as part of a will contest, and not as a simple inheritance, decides that someone is legally entitled to part of the estate, that person should inherit only $1.

8-4:4.2 Illegal Beneficiaries

The second path the attorney must take is to protect the client from illegal beneficiaries-those who would take advantage of the elderly client’s susceptibil­ ity to the undue influence of others. Unfortunately. the term •·others” as used here includes the attorney who drafts the client’s Last Will and Testament, the subscribing witnesses, and the client’s caregivers.

8-4:4.2a Devises to Certain Attorneys and Other Persons

Both the Texas Disciplinary Rules of Professional Conduct and the Texas Estates Code prohibit a lawyer from preparing a will for an individual if the attorney is a bene­ ficiary and also if the attorney’s parent, child, sibling, or spouse is a beneficiary.tiO This general admonition does not apply to wills where the beneficiary is also the testator’s spouse, ascendant, or descendant, or related within the third degree of consanguini­

ty.61 It also does not apply to a bona fide purchaser for value from a devisee in a wil1.o2

8-4:4.2b Bequests to Certain Subscribing Witnesses

Under Texas law, a testamentary gift to a beneficiary who is also a witness to the will is presumed void.@ The testimony of such a witness about the attestation is suspect because he or she has a motive to lie.

Three exceptions exist to this rule. First, the prohibition does not apply if the wit­ ness would be an heir of the testator if the testator had actually died intestate. If this is the case, the witness may receive the bequest under the will provided it does not exceed the share of the testator’s estate the witness would have taken under intestate succession.(}’

Second, the prohibition shall also not apply if the will can “be otherwise estab­ lished” such as by the testimony of another witness.t,.;

1l1ird. if the testimony of the witness-beneficiary is corroborated by a disinterested and credible person, the witness-beneficiary may retain the testamentary gift.66 vVe note that this “disinterested and credible person” need not be an attesting witness to the will. Considering the people present at the will execution ceremony, he or she would most likely be the attorney who supervised the ceremony!

8-4:4.2c Pre-Emptive Strikes Against Undue Influence

Undue influence occurs when someone-an influencer-exerts pressure and thus causes the testator to include a provision in a will that he or she did not intend to include. Texas law lays out three elements for the existence of undue influence:

  1. the existence and exercise of an influence upon the testator;
  2. which operated to subvert or overpower the testator’s mind at the time the will was executed; and
  3. such that the will would not have been executed but for the influence.

Some Texas courts have listed 10 factors to determine whether the three elements of undue influence existed in any given case. These IO factors are:

  1. the nature and type of relationship existing between the testator, the contes­ tants, and the party accused of exerting such influence;
  2. the opportunities existing for the exertion of the type of deception possessed or employed;
  3. the circumstances surrounding the drafting and execution of the testament;
  4. the existence of a fraudulent motive;
  5. whether there had been a habitual subjection of the testator to the control of another;
  6. the state of the testator’s mind at the time of the execution of the testament;
  7. the testator’s mental or physical incapacity to resist or the susceptibility of the testator’s mind to the type and extent of the influence exerted;
  8. words and acts of the testator;
  9. weakness of mind and body of the testator, whether produced by infirmities of age or by disease or otherwise; and
  10. whether the testament executed is unnatural in its terms of disposition of property.67

An attorney called upon to draft a Last Will and Testament for an elderly person who appears suscep6ble to influence and who appears to be under the influence of a

rdomineering relative or someone e1se should act promptly to ensure that he or she is not used as an instrument in a scheme of undue influence.

Testamentary Trusts

In Chapter 9, we sha11 turn our fu1l attention to a11 sorts of trusts as they relate to the elderly. Here, we briefly introduce the concept of testamentary trusts. Expressed in simple terms, a testamentary trust is a tool a testator writes into his or her Last Will and Testament to extend control over property years into the future. The trust sits in the Last Will and Testament, waiting until the testator dies. Upon the testator’s death, the trust is activated to fulfill his or her goals. The goals of such trusts are myriad. Consider the following two possibilities:

  1. A trust for minors. The testator may want his or her estate to pass to his or her children after he or she dies. The children are adults, so they can be beneficia­ ries under the testator’s Last Will and Testament. However, the testator would also like his or her grandchildren to be beneficiaries of his or her estate, espe­ cia1ly for their education or their health care if this becomes necessary. But the grandchildren are young and inexperienced. The solution is the creation of a testamentary trust that leaves the grandchildren’s share to a trustee and gives explicit instructions to this trustee about the management and distribution of this inheritance.
    1. A trust for a disabled family member. The testator may have a family member who is physically or developmentally disabled. This person may be receiving Supplemental Security Income from the Social Security Administration that pays his or her medical bi1ls. If the testator leaves an inheritance for that per­ son, he or she may lose the Social Security benefits. To avoid this, the testato can leave funds to a testamentary trust tailored to meet the requirements o the law, providing benefits to the disabled family member while a11owing hirr. or her to retain the Social Security benefits.

As these two above-mentioned examples illustrate, testamentary trusts are useful too]s. The decision whether to include any such trusts in a Last \Vil] and Testament depends on the goals of the testator vis-a-vis his or her relatives and loved ones alive at the time of wil1 preparation.

Safeguarding the Will

Now that the Last Will and Testament is written, the Elder has to figure out where and how to safeguard the document. Texas law provides a mechanism whereby a tes-­ tator, or a person acting on behalf of the testator, may deposit the testator’s will with the County Clerk of the county of the testator’s residence.68 Before accepting the will for deposit, the clerk may require proof concerning the testator’s identity and resi­ dence.69 As of mid-2017, the fee for depositing a will with a County Clerk is $5.00.70The

clerk wi11 issue to the testator-or the person who deposits the will on the testator’s behalf-a certificate of deposit for the will.;1

Texas law also stipulates certain procedures to be followed in preparation for the depositing of the will-that is, the enclosing of the will in a sealed wrapper with the name. address, and signature of the testator written thereon72-and afterwards (i.e., the numbering and indexing of the deposited will by the County Clerk73).

1l1e depositing of the will with the County Clerk has no legal effect, and does not enhance the likelihood of the will being deemed valid.7”

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Advance Directives

 7-5  Texas Advance Directives Act

Effective September 1, 1999, the Advance Directives Act consolidated three areas of Texas law that had previously been found in three different statutes operating without any coordination with each other: (1) the Directive to Physicians and Family or Surro­ gates (formerly the Natural Death Act); (2) the Medical Power of Attorney (formerly the Durable Power of Attorney for Health Care); and (3) the Out-of-Hospital Do-Not­ Resuscitate (OOH-DNR) orders.

Before the Advance Directives Act became law in 1999, the three separate statutes, passed in three separate decades, were not well coordinated with each other. Current Texas law on advance directives is uniform and much easier to use.

:1 Directive to Physicians and Family or Surrogates

A competent adult has the right to refuse medical treabnen t for any reason even if such refusal will lead to an otherwise preventable death. But if the person is in a coma, is brain damaged, or for some other reason is unable to communicate his or her wishes, the only way his or her physician, family members, or surrogate medical decision maker would know such wishes would be through a “living will” in which the person would have expressed his or her desire to be or not to be kept alive through the use of medical technology if he or she were ever in a terminal condition and were then unable to communicate his or her wishes to decline or not further life-sustaining treatment.

In 1977, Texas became the fifth state of the union to enact “living will” legislation when the legislature enacted the Natural Death Act. In 1999, the legislature re-codified the Act in the Advanced Directives Act, now found in Sections 166.031-166.051 of the Texas Health and Safety Code.

:1.1·Formal Requirements

As an initial matter, we note that although many people still refer to this instrument as a living will, Texas law no longer uses this term. Instead, the Texas Instrument is nmv called a Directive to Physicians and Family or Surrogates. The statute simply refers to it as a “directive.”

In Texas. any competent adult may execute a directive.25 The dedarant must sign the directive in the presence of two competent adult witnesses,26 at least one of whom is not a person involved in his or her health care.27171e witnesses must also sign the instrument.”

In lieu of signing in the presence of witnesses, the declarant may sign the directive and have his or her signature acknowledged before a notary public.29

7-5:1.2 Notice to Physician

A patient who has executed a directjve must inform his or her attending physician of that fact.30 If the person is incompetent or otherwise mentally or physically unable to communicate. another person may notify the attending physician of the existence of the directive.31 Upon being informed, the attending physician wi11 make that informa­ tion a part of the declarant’s record.32

7-5:1.3 Form of Written Directive

1l1e Health and Safety Code provides a fill-in-the-blank form for use in creating a directive. We reproduce this form in Appendix 14.

However, the law does not require the use of this form, or of any form provided by a physician, health care facility, or health care professional.:o

( c )  A declarant may include in a directive directions other than those provided by Section 166.033 (Form of Written Directive) and may designate in a directive a person to make a health care or treatment decision for the declarant in the event the declarant becomes incompetent or otherwise mentally or physically incapable of communication.

( d ) A declarant shall notify the attending physician of the existence of a written directive. If the declarant is incompetent or otherwise mentally or physically incapable of communication, another person may notify the attending physician of the existence of the written directive. The attending physician shall make the directive a part of the declarant’s medical record.

…

Medical Power of Attorney

ln the Elder Law context, in a medical power of attorney, the elderly person, as princi­ pal, appoints an agent to make health care decisions on his or her behalf that he or she could make if he or she were competent.76 Pursuant to the Health and Safety Code, the agent may be anyone except:

l.  the principal’s health care provider or his or her employee, unless that person is a relative of the principal: or

2. the principal’s residential care provider or an employee of the residential care provider, unless that person is a relative of the principal.79

The medical power of attorney must be made in writing, and normally must be signed by the principal ini the presence of two witnesses who must themselves sign the document.60The witness requirements are similar to those for a Directive to Phy­ sicians and Family or Surrogates.st

In lieu of signing in the presence of the witnesses, the principal may sign the medi­ cal power of attorney and have the signature acknowledged by a notary public.82

If the principal is physically unable to sign, another person may sign the medical power of attorney with the principal’s name in the principal’s presence and at the principal’s express direction.83 Toe person may use a digit.al or electronic signature to “sign” the principal’s name.84

To be effective, the medical power of attorney must be delivered to the agent.8-5 Upon becoming effective, the power of attorney remains effective until it expires-if it contains an expiration date-it is revoked, or the principal becomes competent.86

7 -7: 1 Revocation of Medical Power of Attorney

A medical power of attorney can be revoked by the principal making an oral declara­ tion or handing a written notification to the agent or a licensed or certified health Or’ residential care provider, or by any other act that evidences the principal’s intent to revoke the power.87 The principal’s competency or mental state is irrelevant to his or her ability to issue this notification.88

111e principal can also revoke the power of attorney by executing a new one.8 Finally, a medical power of attorney is revoked by the divorce of the principal and

his or her spouse if the  spouse is named as the principal’s agent, unless the medical

power of attorney provides otherwise.90

:2 Disclosure and Form

Health and Safety Code§ 166.164 provides the form that the principal completes and signs to appoint an agent to make health care decisions. The principal may provide individualized instructions in the section labeled “Limitations of the Decision-Making Authority of My Agent.” The power requires either (1) two witnesses or (2) notariza­ tion.91 Vve include a sample Medical Power of Attorney Designation of Health Care Agent form in Appendix 16.

:3 Potential Conflicts

Because life is uncertain-even as the end of life approaches-as people view various issues differently, conflicts sometimes arise over the: care of the elderly as the people entrusted with such care fail to always “see ey-e to eye.” Here, we cover a few of these conflicts.

7-7:4 Appointment of a Guardian

If a court appoints a guardian for a principal, the court: will determfae whether it should suspend or revoke the authority of the agent under the medical power of attorney?.? However, because the medical power of attorney expresses the principal’s wishes for his or her health care, he or she could write into the medical power of attorney just what he or she would desire regarding health care and should he or she ever be declared incompetent and be in need of a guardian. That way, when the judge makes

his or her determination, he or she will have the principal’s own words before him or her to consider.

7-5   :5 Conflict Between Advance Directives

In a conflict between any of a patient’s advance. directives, the directive executed later in time has priority.93 Looking specifically at the Directive to Physicians and Family or Surrogates and the medical power of attorney. a connict can arise only if both docu­ ments name agents who are not the same person. If, however, both instruments name the same person as agent, no conflict will exist. If the Directive to Physicians and Family or Surrogates does not. appoint an agent, it will dominate the medical power of attorney for the simple reason that it speaks directly to the physician, not to an agent who then communicates to the physician the patjent’s wishes.

Further, if the patient has signed only a medical power of attorney, the 1999 Act allows the agent to ,vithhold or withdraw life support systems-and to put the patient into a hospice progra.111.!>’1l1is power did not exist under the law that preceded the 1999 Act.

7-7:6 Duty of Health or Residential Care Provider

A principal’s health or residential care provider must follow the instructions given by the principal’s agent unless he or she feels the instructions are contrary to the principal’s wishes, the law, or the medical power of attorney’s limiting statement.9:; ‘That being said, the attending physician does not have a duty to verify that the agent’s directive is consistent with the principal’s wishes or religious or moral beliefs.96

:7 Limitations on Liability

An attending physician. a health or residential care provider, or a person acting as an agent for or under the physician’s or provider’s control is not subject to criminal or civil liability and has not engaged in unprofessional conduct for an act or omission if the act or omission:

  • is done in good faith under the terms of the medical power of attorney, the directives of the agent, and the provisions of the Health and Safety Code; and
  • does not constitute a failure to exercise reasonable care in the provision of health care services.97

7-7:8 Liability for Health Care Costs

The agent is not responsible for paying the bill for the care chosen; indeed, the fact that an agent consents to medical treatment for the principal has no effect 011 the per­ son financially liable for the costs associated with that care-the principal/patient.98

,Out-of-Hospital Do-Not-Resuscitate Order

TI1e 1995 Texas Legislature authorized a physician. in accordance with his or her patient’s wishes or the wishes of the patient’s legally authorized representative, to issue an order directing health care professionals acting in out-of-hospital settings to refrain from initiating or continuing certain life-sustaining procedures. These provisions were re-codi.fied in 1999 as part of the Advance Directives Act. This order is designated as an OOH-DNR order. OOH-DNR orders are effective when a patient, in a terminal condi­ tion, is in a set1ing such as a long-term care facility, hospice, or even a private home and health care professionals are called for assistance.’)’)The order also applies to situations where the person is in transport in an ambulance or other vehicle.100

7-8.1 Life-Sustaining Procedures Covered by the Out-of­ Hospital DNR Order

TI,e OOH-DNR order is effective only with respect to certain specified life-sustaining procedures including:

  1. cardiopulmonary resuscitation;
  2. advanced airway management;
  3. artificial ventilation;defibrillation;transcutaneous cardiac pacing; and
  4. other life-sustaining treatment specified by the Texas Board of Heath.101
  5. An OOH-DNR order may not authorize the withholding of any treatment designer to provide comfort. care. or pain relief, or the withholding of water and/or nutrition.1‘

7-8:2 Requirements for the Out-of-Hospital DNR Order

TI1e requirements for an OOH-DNR are provided for in Health and Safety Code

§ 166.082.

:3 Rules Governing Execution

A competent person any at: any time execute an OOH-DNR order.103 TI1e declarant must sign the OOH-DNR order in the presence of nvo witnesses, both of whom qualify under Health and Safety Code 8 166.003 and at least one of whom must be a witness who quali­ fies under Health and Safety Code§ 166.003(2). ·111e witnesses must sign the order. The

declarant’s attending physician must sign the order, and must make the fact of the order’s existence and the reasons for its execution a part of the declarant’s medical record.1 1 in lieu of signing in front of witnesses. the declarant may sign the OOH-DNR order and have the signahire acknowledged before a notary public.105

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Paying for Long-Term Care

Introduction

One of the greatest financial risks faced by elderly Texans is the prospect of long­ term care in a nursing home facility. vVhy? Because long-term care is expensive-very expensive.

Over the past few years, the cost of nursing home care has been steadily increasing.

\1/hen Genworth Financial began its annual Cost of Care Survey in 2004, the median cost for a private room in a nursing home nationwide was $65,185.1 By 2019, the cost had risen to $102,200.2 Meanwhile, the median annual cost of care in an assisted living facility in the United States in 2019 was $48,612, a 68.79% increase from the $28,800 figure in 2004.3 As regards in-home care, the median annual cost in the United States in 2019 was $51,480, up from $30,095 in 2004.’1 Texas is below the national average. In 2019, the median annual cost for a private nursing home room in Texas was $77,015; the median annual cost for care at an assisted living facility in the state was $45,000; the median care of in-home care-using the services of a home health aide-was

$47,476.5 However, like costs across the nation, the cost to Texans is expected to increase over time. Genworth projects that by 2029, the median annual cost of a pri­ vate room at a nursing home in Texas will be $103,502, the median cost of caring for a loved one at an assisted living facility will be $60,476, and the median cost of in-home care across the state when utilizing the services of a home health aide will be $64,572.6

How will Texans pay these exorbitant costs? In fact, how do Texans pay for long­ term care today? The fact is, paying for care requires careful planning. l11e attorney retained to assist a client in planning to pay for long-term care must understand the client’s options and limitations. The attorney must be aware that both private and gov­ ernment funding of long-term care is available, and that while both sources impose some limitations, both offer some significant opportunities. Whether the attorney devises a plan that utilizes solely piivate funding, one that utilizes solely government funding. or one that utilizes a combination of the two, a well-thought-out plan can save the client much heartache-and much money!

Elderly Texans have three options regarding payment for long-term care. The most popular and well known are the government programs-Medicare and Medicaid. l11e second option is private insurance. Third are people who either do not have or cannot afford health insurance and who are not covered by the Patient Protection and Afford­ able Care Act.7 who pay out of pocket or out of their own family’s pockets.

Government Programs

The government-state and federal-provides two main programs for funding long­ term care for the elderly: Medicare and Medicaid. The government also provides funding for the care of elders who are veterans of the country’s armed forces. This text will look at these veterans’ benefits as they relate to elders. But first we begin with Medicare.

6-2:1 Medicare

On July 30, 1965, President Lyndon B. Johnson signed the law that established the Medicare program.8 Simply stated, Medicare is a federal health insurance program that pays for a variety of health care expenses. It is administered by the Centers for Medicare and Medicaid Services (CMS), a division of the U.S. Department of Health and Human Services.9 Medicare beneficiaries are typically senior citizens aged 65 and older. Adults with certain approved conditions (such as Lou Gehrig’s disease) or qualifying permanent disabilities may also be eligible for Medicare benefits.

Prior to 1965, approximately half of all seniors lacked medical insurance; today, because of the Medicare program, practically all seniors have health insurance. Since the beginning of the Medicare program, the authorities have made an umber of changes geared to expand benefits, revise the way Medicare pays providers, modify beneficiary out-of-pocket costs for Medicare-covered services, improve access and coverage for low-income individuals, expand the role of private plans in providing Medicare-covered benefits, strengthen quality, and address the growth in program spending.

Today, the program helps to pay for many vital health care services, including hospi­ talizations, physician visits, and prescription drugs, along with post-acute care, skilled nursing facility (SNF) care, home health care, hospice, and preventive services.

On average, Medicare covers about half (48%) of the health care charges for those enrolled. The enrollees must then cover the remaining approved charges either with supplemental insurance or with another form of out-of-pocket coverage. Out-of-pocket costs can vary depending on the amount of health care a Medicare enrollee needs. These out-of-pocket costs might include uncovered services-such as long-term, den­ tal, hearing, and vision care-and the supplemental insurance.

TI1e program is funded through a government-imposed tax.10 People who are work­ ing contribute payro11 taxes to Medicare. Most people then become eligible for Medi­ care benefits when they reach age 65, regardless of income or health status.11

6-2:1.1  Medicare’s Programs

Now covering over 58 million Americans, Medicare plays a vital role in providing financial security to older people and persons with disabilities. The program is admin­ istered on the national level by the CMS, under the supervision of the U.S. Depart­ ment of Health and Human Services.

The Medicare program is rea11y made up of three parts-Parts A, B, and D. Parts A and Bare often referred to as “Original Medicare.” Part A provides hospital insurance benefits for the elderly and disabled.12 Part B provides supplemental health insurance benefits for the elderly and disabled individuals.13 Part D, also called the Medicare Prescription Drug Benefit, is a federal government program designed to subsidize the costs of prescription drugs and prescription drug insurance premiums for Medicare beneficiaries. It was enacted as part of the Medicare Modernization Act of 2003,1-1 which went into effect on January 1, 2006.

Today, a fourth leg in the Medicare program has come into being. Some people mis­ takenly believe it is a part of the program. In reality, it is not. Medicare Part C, often referred to as “Medicare Advantage,” is not a separate Medicare benefit Rather, it is that part of Medicare policy that a11ows private health insurance companies to provide Medicare benefits. TI1ese Medicare private health plans, such as Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs), are known as Medicare Advantage Plans. We sha11 discuss them-and Medicare Part C-later in this chapter.

As a final matter, we note that beginning with the passage of the Affordable Care Act (ACA) of 2010,15 a number of provisions affecting Medicare-including benefit improvements, spending reductions affecting providers and Medicare Advantage Plans, delivery system reforms, premium increases for higher-income beneficiaries, and a payro]] tax on earnings for higher-income individuals-have come into being. These changes are being phased in over time. As we go to press, however, the future of the ACA and these provisions faces some measure of uncertainty. Notwithstanding this uncertainty, the ACA is stil1 good law, and the holding of the Federal District

Court in Texas v. Uuited State,s16 that the entire ACA is unconstitutional has not yet been implemented as the case goes through the appeals process. Meanwhile, the Medicare program continues to be a part of the Texas landscape.

6-2:l. la      Medicare Part A

Medicare covers services Oike lab tests, surgeries, and doctor visits) and supplies Oike wheelchairs and walkers) considered medically necessary to treat a disease or condition.17

Medicare Part A is a hospital insurance plan that provides benefits for qualified individuals in hospitals, SNFs, or hospice care, or receiving long-term home health care services.16 An elderly person receiving benefits pursuant to a Medicare Advan­ tage Plan may be subject to different rules; however, regardless of the plan the indi­ vidual has, his or her plan must offer some basic services. In general, then, Medicare Part A covers:

  1. hospital care;
  2. SNF care;
  3. nursing home care (as long as custodial care is not the only care the person needs);
  4. hospice; and
  5. home health services.19

Like other hospital insurance plans, Medicare Part A benefits are subject to a deductible and co-insurance.20

6-2:1.lb Medicare Part B

Essentially, Medicare Part B is a medical insurance plan.21 It covers “medically nec­ essary services”-that is, services that are needed to diagnose or treat someone’s medical condition and that meet accepted standards of medical practice.n Part B also covers “preventative services”-health care designed to prevent illness (like the flu)

or to detect it at an early stage when treatment is most likely to work best.23 Patients pay nothing for most preventive services if they get them from a health care provider who accepts assignment (an agreement by the healthcare provider to accept payment from Medicare and to seek no other payment).24

Medicare Part B covers services such as:

  1. clinical research;
  2. ambulance services;
  3. durable medical equipment (DME);
  4. mental health services including inpatient, outpatient, and partial hospitaliza­ tion services;
  5. getting a second opinion before surgery; and
  6. limited outpatient drugs.25

What Medicare covers

What Part A covers

Medicare Part A hospital insurance covers inpatient hospital care, skilled nursing facility, hospice, lab tests, surgery, home health care.

What Part B covers

Learn about what Medicare Part B (Medical Insurance) covers, including doctor and other health care providers’ services and outpatient care. Part B also covers durable medical equipment, home health care, and some preventive services.

6-2:1.1 c Medicare Part D

Medicare Part D is optional prescription drug coverage.26 It is available as a stand­ alone prescription drug plan through private insurance companies. The monthly fee varies among insurers. The enrollee will share in the costs of the prescription drugs according to the specific plan in which he or she is enrolled. Those costs can include a deductible, a flat co-payment amou.nt, or a percentage of the full drug cost (called “co-insurance”).27

In actuality, someone who wants a prescription drug plan can obtain it througr Medicare Plan D or through the Medicare Advantage program.

6-2:1. ld Medicare Part C-Medicare Advantage

Medicare Part C, also known as the Medicare Advantage program, is not a part of tht Medicare program. It is actually a health insurance program wherein private health insurance companies offer health insurance in a government-run program. Essen­ tially, private insurance compaF1ies are contracted through CMS to provide Medicare

benefits packages to individuals already enrolled in Medicare Part A or B.28 Enrolling into a ledicare Advantage Plan is optional for any senior individual, so long as he or she is current on his or her premium payments.29

\\nile Medicare Advantage Plans are required to provide all Medicare Part A and

:\ledica.re Pa.rt B benefits (except hospice care) to their enrollees, plans can also include additional benefits that may vary among the individual insurers. including benefits not offered by Parts A and B.30 Plans may also charge different out-of-pocket costs and have different rules for delivering their services.31

In actuality, someone who wants a prescription drug plan can obtain it through

:\1edicare Plan D or through the Medicare Advantage program.

Because this book is about Elder Law and focuses on issues of the elderly in Texas, we now turn our attention to three aspects of Medicare’s coverage that would help tJ1e elderly pay for their long-term care: SNF care coverage, home health care coverage, and hospice and respite care coverage.

6-2:1.2 Medicare’s Skilled Nursing Facility Care Coverage

In this subsection, we begin a study of three aspects of Medicare’s coverage that have the potential to benefit elderly Texans: SNF care coverage, home health care cover­ age, and hospice and respite care coverage.

Medicare Part A covers skilled nursing care provided in an SNF under certain conditions for a limited time. Essentially, Medicare pays for 20 days of skilled care or rehabilitation in a nursing home or in an SNF-but only after the patient has been discharged from an acute care hospital.31

To qualify for Medicare’s SNF care coverage, the patient must first spend at least 3 days in an acute care hospital (not including the day of discharge) .:i.1111e patient must also be sent to the SNF on doctor’s orders within 30 days of the day he or she leaves

Things to know about Medicare Advantage Plans

 

Medicare Part C: Everything You Need to Know  (Medicare Part C Is Another Name for Medicare Advantage)

 

Skilled nursing facility (SNF) care

the hospital.3•1 This move from hospital to SNF enables the Medicare Part A benefit­ hospitalization-to cover the SNF’s fees in full for the first 20 days.35

After the first 20 days, the patient must contribute $176 (2020 figures) to his or her care.36 This co-payment continues until the patient has been at the nursing home for 100 days. After the firsl 100 days, the patient must pay the entire bill,37 or find another program (like Medicaid) to assist with payments.

The 100 days of coverage can be repeated if enough time lapses between illnesses. However, during that period, the patient must be on his or her own-not in a hospital, nursing home, or SNF-for at least 60 consecutive days.38 Hence, a patient can spend 100 days at an SNF, be discharged, spend 60 days at home, then have another 3-day stay at the hospital, and move to an SNF for another 100 days.

6-2:1.3  Medicare’s Home Health Care Coverage

For any given patient, Medicare Part A (Hospital Insurance), Medicare Part B (Med­ ical Insurance), or both will cover eligible home health services like intermittent skilled nursing care, physical therapy, speech-language pathology services, and con­ tinued occupational services.39 Typically, a home health care agency coordinates the services the doctor orders for the patient and arranges for their delivery or perfor­ mance. That being said, Medicare does not pay for the following services:

  1. twenty-four-hour-a-day care at home;
  2. meals delivered to a patient’s home;
  3. homemaker services; and
  4. personal care.40

6-2:1.3a Eligibility for Home Health Care Coverage

To be eligible for home health care coverage. the patient must be covered by either Medicare Part A or Medicare Part B. 1 Additionally, the patient must meet all of the following conditfons:

  1. He or she must be under the care of a doctor, and must be getting services under a plan of care established by and reviewed regularly by a doctor.
    1. TI1e patient must need, and a doctor must certify that he or she needs, one or more of the following:
      1. Intermittent skilled nursing care is required (other than for just drawing blood). If the patient’s underlying condition or complication requires a registered nurse to ensure that essential non-skilled care is achieving its purpose. and necessitates that a registered nurse be involved in the development. management, and evaluation of the patient’s care plan, the referring physician must include a brief narrative describing the clinical justification for this need. If the narrative is part of the certification form. then the narrative must be located immediately prior to the physician’s signature. If the narrative exists as an addendum to the certification form, in addition to the physician’s signature on the certification form, the phy­ sician must sign immediately following the narrative in the addendum.
      1.            Physical therapy, speech-language pathology, or continued occupational therapy services are required. These services are covered only when the services are specific, safe, and an effective treatment for the patient’s con­ dition. The amount, frequency, and time period of the services need to be reasonable, and must be sufficiently complex or of a nature that only qualified therapists can perform them safely and effectively. To be eligible for Medicare coverage, (1) the patient’s condition must be expected to improve in a reasonable and generally predict.able period of time, (2) the patient needs a skilled therapist to safely and effectively develop a mainte­ nance program for his or her condition, or (3) the patient needs a skilled therapist to safely and effectively do maintenance therapy for his or her condition.”12
      1. The home health agency caring for the patient must be Medicare­ certified. In fact, Medicare.gov has made a checklist available to the pub­ lic that patients and thir family members can use the determine whether the home health agency they intend to use to provide care for the elderly patient is not only Medicare-certified, but satisfies several other criteria which indicate that the agency will provide excellent services.’D
      1.                 rn1e patient must be home bound, and a doctor must certify that fact.’11 The certification must indicate that the patient is confined to home except when he or she is receiving outpatient services. The certification must also lay out a plan for the patient’s treatment and eventual recovery.·15

As these requirements indicate, someone is not eligible for home health benefits if he or she  needs more than part-time or “intermittent” skilled nursing care.46

The rules also allow a patient to leave home for medical treatment for short, infre­ quent absences for non-medical reasons such as attending religious services. Like­ wise, an individual can st.ill get home health care if he or she attends adult day care.-‘7

As a final matter, note that home health services may also include medicaJ social services, part-time or intermittent home health aide services, medical supplies for use at home, DME, or injectable osteoporosis drugs:18

Home health services

Home Health Agency Checklist

6-3 Costs of Care

An eligible person incurs zero costs for home health care services; instead, the home health agency providing the care is reimbursed by the U.S. Department of Health and Human Services.·19 However, should the patient be eligible to-and does use­ Medicare-approved DME21, he or she will be responsible for meeting 20%ofthe cost.50

law’s definition of “home” excludes institutions such as hospitals, community access hospitals. and SNFs.54

DME is often essential for people with short-term and/or chronic conditions. To be covered by Medicare. DME must be prescribed by a licensed physician, must be necessary to address a medical or physical need, and must not ordinarily be used in the absence of a medical or physical condition.55 TI1e ACA of 2010 introduced the requirement of a face-to-face encounter between the patient and the physician before DME can be prescribed.56 As an additional fraud and abuse protection measure, the ACA states that only Medicare-enrolled physicians or other ”eligible professionals” can prescribe DME.57

6-3  :2 Advance Determination of Medicare Coverage

The Centers for Medicaid and Medicare Services advises on its website that before someone begins receiving home health care, the home health agency should tell him or her just how much of the cost Medicare will cover.61 The agency should also inform the beneficiary whether any items or services it provides are not covered by Medi­ care, and the cost of these items and/or services to the beneficiary.62 The agency should explain this to the beneficiary both orally and in writing. The same rule applies for the supply of DME. The easiest way to achieve this is by giving the patient a notice called the Home Health Beneficiary Advance Notice of Noncoverage.63 The patient can thereby know the cost of proposed services, equipment, and supplies before receiving them, and have the opportunity to accept or object to receiving them.

6-4   Hospice and Respite Care

…

 

6-3   :1 Texas Healthcare for People Age >65 and People With Disabilities

Texas has several Medicaid programs for low-income individuals aged 65 and above and people with disabilities. TI1ese programs include: (1) Medicaid for Long-Term Care, (2) Medicaid for People Who Get Supplemental Security Income (SSD, (3) Medi­ care Savings Program, and (4) MBI for adults.78

Medicaid and CHIP | Texas Health and Human Services

6-5:1.1 Medicaid for Long-Term Care

The Texas Medicaid for Long-Term Care79 program provides all Medicaid benefits including:

  • doctor’s visits:
    • prescription drugs ordered by a doctor;
    • lab and X-ray charges;
    • hospital care;
    • vision and hearing care; and
    • dental care.

Medicaid also might pay for health care the person received 3 months before he or she applied for Medicaid services.

Depending on the person’s circumstances, he or she may also receive long-term services such as:

  • community programs while he or she is living at home;
    • home care:
    • nursing home care;
    • a hospital for mental illness; and
    • a place of care for people with intellectual disabilities.

The Medicaid for Long-Term Care program is designed for individuals who:

  1. are either 65 or older or have a disability that is expected lo last a year or lon- ger;
  2. need 30 or more days of non-stop, long-term care;
  3. meet Medicaid’s low-income requirements; and
  4. meet Medicaid’s low-asset/resources requirements.

An individual who qualifies for the Texas Medicaid for Long-Term Care program must pay part of the cost by first using all of his or her own money, except for a small monthly amount for personal needs and costs like health insurance premiums.

6-5:1.2 Medicaid for People Who Get Supplemental Security Income

The Texas Medicaid for People Who Get Supplemental Security Income (SSI) program80 provides the same basic benefits as the Medicaid for Long-Term Care program-that is, all Medicaid benefits including:

;9 Texas Health and Human Services, Health Care, Medicaid for Long-Term Care, available at h ttps://yourtexasbenefits.hhsc.texas.gov/ programs/health/disability-or-65plus/long­ term-care 0ast visitedMay 5, 2020).

WJ Texas Health and Human Services. Health Care, Medicaid for People Who Gel Supplement Security Income (SSO. available at https://yourtexasbenefits.hhsc.texas.gov/programs

  • doctor’s visits;
    • prescription drugs ordered by a doctor;
    • lab and X-ray charges;
    • hospital care;
    • vision and hearing care; and
    • dental care.

Medicaid also might pay for health care the person received 3 months before he or she applied for SSL

This program is available only to persons who are receiving SSL

6-5:1.3  Medicare Savings Program

17,e Medicare Savings Program helps beneficiaries pay for all or some of their Medi­ care monthly payments-that is. premiums, co-pays, and deductibles.81 To qualify for this program, the applicant must be receiving Medicare benefits, and must satisfy the Medicaid low-income and asset requirements.

6-5:1.4  Medicaid Buy-In for Adults

171is program offers the basic Medicaid offerings to participants:

  • doctor’s visits;
    • prescription drugs ordered by a doctor;
    • lab and X-ray charges;
    • hospital care;
    • vision and hearing care: and
    • dental care.82

To qualify, applicants must (1) have a physical, developmental, intellectual, or mental disability; (2) be working; and (3) not permanently reside in a nursing home, state hospital, or intermediate care facility for people with.intellectual disabilities.

As regards cost, the program operates pursuant to its name: People can “buy-in” to Medicaid coverage by making monthly payments.

/health/disability-or-65plus/have-SSI Oast visited May 5, 2020).

111 Texas Health and Human Services, Health Care, Medicare Savings Program, available at https://yourtexasbenefits.hhsc.texas.gov/ programs/health/disability-or-65plus/ medicare­ savings-programs Oast visited May 5, 2020).

l(l Texas Health and Human Services, Health Care, Medicaid Buy-In for Adults, available at https:/ / yourtexasbenefits.hhsc.texas.gov / programs/health/disability-or-65plus/buy-in Oast visited May 5, 2020).

6-5:2 Eligibility for Texas Medicaid

To qualify for Medicaid assistance for nursing home care in Texas. an individual must clear five hurdles: age. residency, level of care, monthly income amount, and asset amount.

6-5:2.1 Aged, Blind, or Disabled

TI1is is the easiest of the five hurdles the elderly long-term care applicant must pass through. Put simply, to qualify for Texas Medicaid assistance, the patient must be 65 or older, blind, or disabled.1’3

6-5:2.2 Citizenship and Residency

Second, the applicant must be a Texas resident.s.1 He or she must have established residence in Texas and must express an intent to remain there.

If a Texas resident temporarily visits another state intending to return to Texas, his or her Texas residency is considered to have never ended so long as the absence from Texas has a specific purpose; when that purpose is ended, the person must move back to Texas.65

The individual must also be a legal resident of the United States: a citizen, a perma­ nent resident, or a person otherwise legally living in the United States.86

6-5:2.3 Level of Care

As an initial matter, we note that Medicaid will not pay for custodial care. However, Texas Health and Human Services provides various long-term services and supports for people who are aging and who have cognitive and physical disabilities.87 TI1e agency also licenses and regulates providers of these services, and administers the state’s guardianship program.

The Texas Medicaid and Healthcare Partnership (TMHP) Long-Term Care Department (LTC) supports the provider community. Providers submit forms and assessments through the LTC Online Portal and render claims for services through the Claims Management System.

TMHP determines the medical necessity and level of care for patients who are Medicaid eligible and meet the medical necessity requirements of admission into a nursing home or a cost-effective alternative to institutionalization. After all, in Texas, Medicaid wiJl pay for a nursing home only if it is “medically necessary” for the patient to be placed there.66

To find that nursing home care is medically necessary for a patient, TMHP must conclude that the patient has a medical condition that is so serious that he or she needs the level of nursing care that is available only in an institution. The patient’s doc­ tor must document the patient’s medical condition and must prescribe ski11ed nursing services to be provided to the patient on a regular basis in an institutional setting. Nursing care includes things like giving shots, inserting a feeding tube or catheter, treating bed sores, and changing wound dressings.

For Medicaid to keep paying for the patient’s nursing home stay, a doctor must cer­ tify at least every 6 months that the patient meets the standard of medical necessity.

6-5:3  Monthly Income Amount

To qualify for Medicaid benefits, an elderly Texan’s income cannot exceed a certain amount per month. 1l1is amount changes annually. For 2019, that figure was $771 for an individual and $1,157 for a couple.89 If the applicants are living in a nursing home, the limits increase to $2,313 for a single individual, and $4,625 for a couple if both spouses are applying for benefits.90

For several years, this income cap proved to be quite harsh. People who were as little as $1 above the limit were being denied Medicaid benefits. To counter that, prac­ titioners and Congress devised the Qualified Income Trust (QIT), known in Texas and a few other states as the Miller Trust.

6-5:3.1 The Qualified Income Trust (Miller Trust)

As an initial matter, we note that a QIT does not shelter assets. It is neither a way to hide money nor a way to save resources. Rather, it is a way to circumvent the income cap imposed by Medicaid.

The ability to use a QIT for those people who have too much monthly income i qualify for long-term care benefits grew out of Miller v. Ibarra, a 1990 federal coUI case from Colorado.91 In Miller, a nursing home resident had too much income to qualify for Medicaid. His family went to court to create a guardianship, and obtained a court order imposing a limit on the amount of retirement funds the resident could use each month. 1l1e court created a trust, placed all of the retirement funds therein, and ordered the trustee to limit withdrawals therefrom to an amount less than the Medicaid income cap.92

Colorado contested the trust, but eventually the federal district court decided the trust was legal.93 Accordingly, Mr. Miller was allowed to receive Medicaid benefits even though his income would be too high without the trust and its limitations.

,u

TI1e Miller Trust became officially known as a QITwhen it was codified at 42 U.S.C.

§ 1396p(d) (4) (B). Pursuant to the statute, the assets put into a QIT are not countable to an individual applying for Medicaid benefits who needs the benefits and protections provided by a QIT.

6-5:3.2 Characteristics of the Qualified Income Trust

Federal law controls the establishment of a QIT. As an initial matter, the law states that a QJT may contain only pension funds, social security funds, and other income (including accumulated trust income) due to a nursing home resident.95 As regards income, the resident may divert all of his or her qualifying income into a QIT, or if he or she has income from multiple sources, only the income from certain sources. However. income from any given source must go entirely into the QIT, or not at all.% ln the final analysis, though, the trust cannot own any other assets. Since the trust has no trust corpus, the need for much of the standard trust language about management of the trust principal is eliminated, and the language of the written trust instrument may be shortened accordingly.

The trust must be irrevocable.97 However, a trust instrument that states that the trust is irrevocable, but allows the trust to be revoked through court action, does not meet the irrevocability requiremenl

The trust instrument may provide for successor or co-trustees waiver of bond and incorporation of the Texas Trust Act provisions about the powers of the trustees. The statutory authority for a QIT is silent on the subject of who may serve as the trustee. but HHSC recommends that the beneficiary not serve as the trustee also.98 Among other concerns, HHSC reports that it has seen many instances where a beneficiary did not follow the trust requirements, resulting in him or her losing Medicaid eligibility.w

Appendix XXXVI, Qualified Income Trusts (QITs) and Medicaid for the Elderly and People with Disabilities (MEPD) Information

Medicaid for the Elderly and People with Disabilities Handbook

The trust instrument must have a reversion clause stating that at the death of the trust beneficiary, the trustee must pay to the state of Texas any funds still in the trust account, up to the full amount of Medicaid assistance that was given to the beneficiary and not otherwise repaid.100 vVhen the time comes to make such reimbursement, pay­ ments made to HHSC, as residuary beneficiary, should be in whole dollar amounts and by cashier’s check, money order, or personal check.101 The trustee should submit the payment along with Form 4100 to HHSC. The trustee should make a notation that this is repayment to HHSC under the QIT provisions of the Social Security Act.102

The QIT legally restricts the amount that can be withdrawn to pay for the nursing home resident’s needs. 111e QIT instrument must require that the trustee pay:

  • a monthly personal needs allowance to the beneficiary;
  • a sum sufficient to give a minimum monthly maintenance needs allowance (MMMNA) to the spouse (if any) of the beneficiary; and
  • the cost of medical assistance given to the beneficiary, from the funds remaining.100

HHSC has prepared a sample QIT for use by persons wishing to create Miller trusts. The language used in the form is by no means the only allowable language. \Ve are including the sample in Appendix 12.

6-5:3.2a Treatment of Trust Income

Trust income must be deposited into the trust account during the month in which it is received; meanwhile, the trustee must make distributions from the trust account no later than the last day of the month following the one in which the trust income was received.

HHSC does not deduct any costs of trust administration in determining the amount of the beneficiary’s income that must be app1ied to the cost of medical assistance given to the beneficiary. Also, HHSC determines the amount that must be applied to the cost of medical assistance given to the beneficiary based on the beneficiary’s total income, including any income that is not diverted to the QIT. If funds remain in the trust account after these distributions are made, such funds may be applied to the cost of trust administration.

Income paid from the trust to purchase institutional services, home and community­ based waiver services, or other medical services for the beneficiary is not countable

income for Medicaid eligibility purposes. However, income paid from the trust directly to the beneficiary, or otherwise spent for his or her benefit, is countable income for eligibility purposes.1C4

6-5:3.2b Establishing a Bank or Other Financial Account as the QJT Account

In addition to preparing a trust instrument that meets the QIT requirements as deter­ mined by HHSC, the attorney must ensure that the trust account is properly set up. A trust account is a bank (or other financial institution, such as a credit union) account used to deposit the income from the sources listed in the QIT instrument. The trust account must contafo only income; it cannot-should not-contain the patient’s resources.105

Once the trust account is opened, only the beneficiary’s income may be directed to it Any income deposited into the QIT bank account from a source that is not listed in the QIT instrument may be countable income and will result in the bank account becoming a countable resource. Any deposits made to the QIT bank account from other resources the beneficiary may own will result in the bank account becoming a countable resource. Any deposits to the QIT bank account from another individual may be countable income and result in all deposits to the account being countable income and the bank account becoming a countable resource.106

6-5:3.2c Effective Date of the QIT

HHSC disregards income for Medicaid eligibility purposes the first month that a valid written trust instrument is signed and properly executed, a trust bank account with the beneficiary’s Social Security number is set up, and enough of the beneficiary’s income is placed into the account to reduce any remaining income to below the spe­ cial income limit107 While the trust may be set up with any or all sources of a benefi­ ciary’s income, an entire income source must be deposited. These things may be done before the beneficiary applies for Medicaid benefits, in which case the effective date

of the income disregard may be established as much as 3 months prior to the applica­ tion filing date (if all other program requirements are met during the prior period).108

6-5    :4 Transfer of Assets

111e phrase “transfer of assets” refers to the general prohibition against a Medicaid applicant or recipient transferring his or her assets without compensation.100 vVhen such a transfer-that is, a transfer of assets without compensation-occurs, it may result in a penalty period for Medicaid payment for institutional care or ineligibility for Medicaid benefits under the Medicaid for the Elderly and People With Disabilities program.110

Now, income that is diverted to a QIT is not a transfer of assets if it is used for payment of institutional services or home and community-based waiver services for the Medicaid for the elderly recipient.111 Also, any distributions to the recipient’s spouse and allowable payments for trust administration are not considered a transfer of assets.112 However, distributions from the trust that are not made to the Medicaid for the elderly recipient or community-based spouse, or for the benefit of either, are considered by HHSC to be a transfer of assets.113

As a final matter, we note that if the trustee fails to make distributions from income deposited into the trust account in the month of receipt by the end of the following month, HHSC considers his or her failure to timely distribute the income to be a trans­ fer of assets subject to the usual penalties associated with such transfers.114

,,,

6-5      Medicaid Planning

I

Medicaid planning is a method by which potential Medicaid recipients-with the help of their attorneys and/or financial planners-manipulate their income and resources so that the government will pay part or all of the cost of their long-term health care.

6-6   :1 Transfer of Assets for Medicaid Planning

Before transferring assets as part of Medicaid planning, the attorney must be aware of two things:

  1. Medicaid rules may disqualify the potential recipient from receiving benefits if

he or she has given away assets.

  • Property transferred by gift may give rise to the imposition of the federal gift tax.

In rea1ity, the federal gift tax is not usually an impediment to Medicaid planning. After all, the lifetime estate and gift tax exclusion amount of over S11 million 138 by far exceeds the typical value of gifts made by individuals engaging in Medicaid planning.

The issue that really arises in Medicaid planning is that of the Medicaid disquali­ fication penalty. The penalty has changed dramatically through the years. Currently, rules included in the Omnibus Budget Reconciliation Act of 1993139 (OBRA ’93) deter­ mine the way the disqualification penalty is imposed. In Texas, the OBRA ’93 rules are augmented by rules found in the Texas Administrative Code. Pursuant to these rules, if a person transfers property by gift and subsequently applies for Medicaid assistance, the person’s disqualification period for receiving such assistance is calcu­ lated by dividing the amount of the gift by the “average cost” of nursing home care for a private-pay patient in the person’s area.1 0

6,-6:1.1   Look-Back Period

TI1e penalty imposed on gifting assets does not apply to all lifetime transfers. Rather, for most assets and forms of income, only transfers within the past 36 months. prior to filing the Medicaid application can be counted in determining the disqualification period.HI 1l1e look-back period for payments and distributions from revocable trusts and irrevocable trusts that benefit the Medicaid recipient is 60 months.1-12

6-5      Medicaid Estate Recovery Program (MERP)

OBRA ’93 not only made it more difficult for individuals to qualify for Medicaid assis­ tance but a1so attempted to make Medicaid less beneficial to the recipient’s family. Pursuant to OBRA ’93, by federal mandate, Texas-like other states in the Union­ must attempt to recoup the funds it spends on Medicaid recipients by making a claim against each deceased recipient’s estate. This claim is made through the MERP.

6-7   :1 Programs and Services Affected by MERP

MERP affects only long-term care services and supports an individual receives after the age of 55, and only if the Medicaid recipient first applied for these services after March 1, 2005.w IJ the Medicaid recipient was on an interest list for Medicaid ser­ vices before March 1, 2005, but did not complete an application for services until after that date, the recipient’s estate is subject to MERP.118

MERP seeks recovery from the estates of decedents who benefited from the fol­ lowing Medicaid-funded services and programs:W)

  1. nursing home care;
  2. intermediate care for individuals with an inte11ectual disability or related condi­ tion; and
  3. the following Medicaid waiver programs:
    1. Home and Community-Based Services (HCS);
    1. Community Living Assistance and Support Services (CIASS);
    1. Texas Home Living (fxHmL) Program;
    1. Consolidated Waiver Program (CWP);
    1. Deaf-Blind \Vith Multiple Disabilities (DBMD);
    1. Community Based Alternatives (CBA);
    1. STAR+ PLUS 0ong-term care services);
    1. Integrated Care Management (ICM); and
    1. Community Attendant Services (CAS).

MERP also affects the costs of certain hospital and prescription drug services received by Medicaid recipients.150 However, Primary Home Care (PHC) is not affected by MERP.151

…

Your Guide to the Medicaid Estate Recovery Program

Beware the MERP: Texas offers huge loophole to recovery program– Jul 5, 2020

HMS can only recover a MERP claim after you die, and then only against the assets that go through your probate estate.

The loophole? There is no recovery against assets that do not go through your probate estate. It only takes a bit of planning on your part to protect your assets. A few popular tactics:

Name a beneficiary (not your probate estate) on your accounts. Ownership of the account goes directly to the beneficiary when you die.

Establish a Revocable Living Trust. The assets that pass through a revocable living trust are nonprobate assets. When you die, your trustee will distribute the assets to the beneficiaries.

Tex. Admin. Code § 373.205- Medicaid Estate Recovery Program (MERP) Claim

chapter pdf,

Posted on

Guardianship

A Texas Guide to Adult Guardianship– Texas HHS

PROTECTING THE INCAPACITATED: A GUIDE TO GUARDIANSHIP IN TEXAS FROM APPLICATION TO OATH-Texas Bar

Guardianship and Related Procedures

Subtitles

A General Provisions  Chapters 1001–1002

B Scope, Jurisdiction, and Venue  Chapters 1021–1023

C Procedural Matters  Chapters 1051–1057

D Creation of Guardianship  Chapters 1101–1106

E Administration of Guardianship  Chapters 1151–1164

F Evaluation, Modification, or Termination of Guardianship  Chapters 1201–1204

G Special Types of Guardianships  Chapters 1251–1253

H Court-authorized Trusts and Accounts Chapters 1301–1302  

I Other Special Proceedings and Substitutes for Guardianship Chapters 1351–1357

J Texas Probate Code: Scope, Jurisdiction, and Venue  Chapter

5-1      Guardianship

Guardianship is a court-supervised procedure for stripping authority from one person and placing it into the hands of another. It is seldom a voluntary procedure; rather, it can often be thrust upon an elderly person if and when he or she becomes incapaci­ tated.

5-3:1 Avoiding Guardianship

Most people view guardianship as a procedure of last resort. In short, they view guardianship as something to be avoided at all costs. Experienced Texas attorney,

Paul Premack, argues that guardianship is (1) expensive, (2) slow, and (3) “a detailed and often troublesome task for the person appointed to be guardian.”31

This being the case. whenever possible, attorneys and their clients should seek to avoid guardianship. The best way to succeed at this, however. is for the proposed ward to engage in pre-planning. Typically, the person’s execution of a durable power of attorney and a medical power of attorney should be sufficient to ward off future guardianship. TI1e durable power of attorney would normally make guardianship1 of the estate redundant, since the principal would have already appointed someone to act on his or her behalf regarding his or her finances and property. Meanwhile, a medical power of attorney negates the need for guardianship of the person since the instrument would have already delegated the power to make health care decisions to someone of the ward’s choosing.

5-2  :2 Declaration of Guardian

Wltile an individual’s execution of both a durable power of attorney and a medical power of attorney should be sufficient to ward off guardianship, it remains true that someone might still try to force him or her into guardianship. Additionally, as we have already discovered, if a court of competent jurisdiction appoints a permanent guardian for the principal, both the durable power of attorney and the medical power of at1or­ ney would become void.32

While it is unlikely that someone would force an elderly person into guardianship knowing that such elderly person has already executed powers of attorney, it is quite possible that a disgruntled family member, unhappy about the proposed ward’s deci­ sions, would indeed make such an attempt. The way to stop this well-meaning relative is for the elderly person to make a “Declaration of Guardian.”

A Declaration of Guardian is a legal document wherein someone tells the court who the person wants to serve as his or her guardian in the event he or she becomes incapacitated and/or a guardianship proceeding is ever commenced against him or her.33 The Declaration allows the declarant to appoint a guardian of his or her estate and a guardian of his or her person. The declarant may appoint one person to fill each role, or could have the same person fill both. Of much importance, the dedarant could disqualify an individual from ever becoming one of his or her guardians.35

The Texas legislature has developed a form for use in the formation of a Decla­ ration of Guardian. However, the form is not exclusive. While it may be used, the legislature does not require that it must be used.36 A sample form and accompanying self proving affidavit is included in Appendix 10. Appendix 11 contains a sample alter­ native to the self-proving affidavit

31 Paul Premack,The Senior Texan Legal Guide, 13 (Longview Publishing ‘1th ed. 2001).

5-3:2.1  Filing of Declaration and Self-Proving Affidavit

No requirement exists that the Declaration be filed with the court in advance. How• ever, the proposed guardian must file the document when he or she goes to court to be appointed guardian (if the need arises). Timing is important: The Declaration must be filed after someone starts a guardianship proceeding (by filing an Application for Guardianship) and before the court appoints a guardian.37

5-3:2.2 Revocation of the Declaration of Guardian

111e declarant may revoke the Declaration of Guardian by using any of the methods authorized for revoking a Last Will and Testament-Le., the declarant could destroy it, cancel it, or have someone destroy or cancel it in his or her presence.38

5-3:2.3  Effect of Divorce

If a declarant designates his or her spouse to serve as guardian and the declarant is subsequently divorced from the spouse before a guardian is appointed, the pro• vision of the declaration designating the spouse is effectively revoked and has no effect.39

5-3:2.4 Alternate or Other Court-Appointed Guardian

lf the guardian designated in the declaration does not qualify, predeceases the declar• ant, refuses to serve, resigns, or is otherwise unavailable to serve as guardian, the court shall appoint the next eligible alternate guardian to serve as guardian.40 How• ever, if none of the eligible alternate guardians named in the declaration are available to serve, the court shall appoint someone else as guardian.-U

5-3:2.5 Private Professional Guardians

To provide a sufficient pool of guardians to meet the need for guardianships in Texas, the Texas legislature has created a class of private professional guardians. These indi· viduals must be certified under Subchapter C, Chapter 155 of the Texas Government Code.42 In addition to being certified as professional guardians, individuals wishing to serve in this capacity must also annually apply for a certificate of registration from the Judicial Branch Certification Commission.43

5-3:2.Sa Application Requirements

To apply for a certificate of registration, a private professional guardian must submit a sworn statement containing the following information:

l.     his or her place of residence;

  • his or her business address and business telephone number;
  • his or her educational background and professional experience;
  • at least three professional references;
  • the name of each ward for whom he or she will be serving as guardian;
  • the aggregate fair market value. of the property of all wards that the private professional guardian is or will be managing;
  • whether he or she has ever been removed as a guardian by the court or has resigned as guardian in a particular case, and if so, a description of the circum- stances leading up to the removal or resignation; and
  • the certification number or provisional certification number issued to the pri­ vate professional guardian by the guardianship certification program of the Judicial Branch Certification Commission.•1-1

The application must be made out to the clerk of the county having venue of the proceeding for the appointment of a guardian for the proposed ward, and must be accompanied by a nonrefundable fee of $40:15

5-3:2.Sb Registration Renewal

The certificate of registration must be renewed annually.,.6 Specifically, an application for renewal must be completed during December of the year preceding the year for which the renewal is requested.47

5-3:3 Mental Health Commitment

Texas law allows any adult to petition a court to force an allegedly mentally ill per­ son to receive clinical attention.48 This mental health commitment is not the same as guardianship. \Vhile mental health commitment is severe and short-term, guardian­ ship is targeted toward the long-term care of an incapacitated person.

Texas law allows mental health commitment under limited circumstances. The judge must find that the proposed patient is mentally ill and that because of this illness, the proposed patient is likely to cause serious harm to himself or to someone else.49 In the alternative, the judge could find that the proposed patient is suffering severe and abnormal mental, emotional, or physic.al distress, accompanied by substantial mental or physical deterioration in his or her ability to function independently, and that he or she lacks the ability to make a rational and informed decision as to whether to submit to inpatient medical treatment.51>

Health and Safety Code Chapter 574. Court-ordered Mental Health Services, Sutitles 574

The purpose of a mental health commitment is to obtain immediate mental health care for the patient. However, the care cannot exceed 90 days.51 Unlike guardianship, the mental health commitment process does not give anyone financial control over the patient or his or her property.

5-3:4 Temporary Guardianship

If a person is at risk but the situation does not fit the mental health commitment guide­ lines, temporary guardianship might be an answer.

A temporary guardianship is a limited guardianship for a short duration; the major­ ity last for a period not exceeding 60 days;52 in special circumstances, they may last 9 months.53 A court may appoint a temporary guardian-with limited powers as the circumstances of the case require-if the court determines that ”probable cause” exists to believe that the proposed ward or his or her estate would benefit from the immediate appointment of a guardian.51 However, notwithstanding the appointment of a temporary guardian, the proposed ward retains all rights and powers the court does not specifically grant to the temporary guardian.55 After all, the fact that the court has appointed a temporary guardian for the proposed ward does not in any way indicate that the proposed ward is incapacitated.56

5-3:4.1 Application for Temporary Guardianship

Temporary guardianship can be initiated without the involvement of the proposed ward. Someone-the applicant-must allege to the court that the proposed ward and/ or his or her property is in imminent danger, and that the temporary guardian is seeking the court’s assistance and protection for the proposed ward.57Once the appli­ cation has been filed, the court appoints an attorney to represent the proposed ward in all guardianship proceedings in which independent counsel has not been retained by or on behalf of the proposed ward.58 At this point, the clerk of the court serves notice of the application on the proposed ward, the proposed ward’s attorney. and. if the proposed temporary guardian is not also the applicant, the proposed temporary guardian.59 11,e notice must describe the rights of the parties, and the date, time, place, purpose, and possible consequences of a hearing on the application.60

5-3:4.2 The Hearing

Upon the court’s receipt of the Application for Temporary Guardianship, the clerk shall issue an order for the hearing on the application.61 Unless the hearing is subsequently

Estates Code Chapter 1251. Temporary Guardianships, Title 3 – GUARDIANSHIP AND RELATED PROCEDURES

postponed by consent of the proposed ward or the proposed ward’s attorney, it shall be held no later than 10 days after the date the application for temporary guardianship is filed.G:!

The proposed ward-or his or her attorney-may move the court to postpone the hearing for a period of up to 30 days after the date the application is filed.63 The pro­ posed ward-or his or her attorney-may also move for dismissal of the application for temporary guardianship.6-1 If the court denies the motion, the parties proceed to the hearing.

Hearings are normally public, but if the temporary ward requests it, the hearing will be conducted in private.65 At the hearing, the proposed ward has the right to

(1) receive prior notice, (2) be represented by counsel, (3) be present, (4) present evidence, and (5) confront and cross-examine witnesses.66

If the applicant for temporary guardianship is not the proposed temporary guard­ ian. the court will not grant the application unless the proposed temporary guardian appears in court for the hearing.67

5-3:4.3 Order Appointing Temporary Guardian

The court shall appoint a temporary guardian by written order if, at the conclusion of the hearing, it determines that the applicant has established that substantial evidence exists that the proposed ward is incapacitated, that there is imminent danger that the proposed ward’s physical health or safety will be seriously impaired, or that the pro­ posed ward’s estate will be seriously damaged or dissipated unless immediate action is taken.68 The court shall assign to the temporary guardian only those powers and duties that are necessary to protect the proposed ward against the imminent danger shown.69 Accordingly, the order appointing the temporary guardian must describe

(1) the reasons for the temporary guardianship and (2) the powers and duties of the temporary guardian_;o

The court will also set bond for the temporary guardian as required by Texas Estates Code Chapter I105.71

5-3:4.4 Duration of Temporary Guardianship

Except for certain temporary guardianships not relevant to our text, a temporary guardianship lasts no more than 60 days.72 Once initiated, a temporary guardianship will (1) end at the initial hearing, (2) be extended by agreement for up to 60 days, or

(3) be extended by court order for up to 60 days. If the temporary guardian wants the guardianship to last beyond 60 days, he or she must file an application for a permanent guardianship.

5-3  :5 Permanent Guardianship

A permanent guardianship begins when an interested person-through his or her attorney-files with the court clerk an Application for Guardianship.

5-3:5.1  Notifications

Although the law imposes no requirement that a proposed ward be consulted prior to the filing of the App1ication for Guardianship, once the application has been filed, the proposed ward is entitled to notice that someone has filed such a pleading.73 Notice must also be served on the proposed ward’s spouse-unless the spouse is the one applying to be guardian.7•1

The law provides a number of ways in which the clerk may serve notice on the pro­ posed ward, including personal service,75 service by mail,76 service by posting,77 ser­ vice by publication,78 and service on the party’s attorney of record.79 Meanwhile, the applicant must mail a copy of the application and a notice containing the information required in the citation issued pursuant to Section 1051.102 of the Estates Code by registered or certified mail, return receipt requested, or by any other form of mail that provides proof of delivery, to the following persons, if their whereabouts are known or can reasonably be ascertained:

  • each adult child of the proposed ward;
  • each adult sibling of the proposed ward;
  • the administrator of a nursing home facility or similar facility in which the pro posed ward resides;
  • the operator of a residential facility in which the proposed ward resides;
  • a person whom the applicant knows to hold a power of attorney signed by the proposed ward;
  • a person designated to serve as guardian of the proposed ward by a written declaration of guardian if the applicant knows of the existence of the declaration:
  • a person designated to serve as guardian of the proposed ward in the probated will of the last surviving parent of the proposed ward;
  • a person designated to serve as a guardian of the proposed ward by a written declaration of the proposed ward’s last surviving parent, if the declarant is deceased and the applicant knows of the existence of the declaration; and
  • each adult named in the application as an “other living relative” of the proposed ward within the third degree by consanguinity, if the proposed ward’s spouse and each of the proposed ward’s parents, adult siblings, and adult children are deceased and there is no spouse, parent, adult sibling, or adult child.

Notwithstanding the notice requirements, anyone other than the proposed ward may waive notice of the application for guardianship.80

Probate courts in major metropolitan areas operate “Court Visitor Programs.” The judge (on his or her own initiative) may require, or anyone involved in the guardian­ ship can ask the judge to require, that a court visitor meet with the proposed ward before the court hearing.81 The court visitor’s job is to give an independent assess­ ment of the proposed ward’s condition.82

Depending on the nature of the guardianship proceeding, four other people deemed “Officers of the Court” may be involved therein: (1) the court investigator, (2) the attorney ad /item, (3) the interpreter, and (4) the guardian ad !item.

5-3:5.2 The Court Investigator

If the person seeking guardianship files the application in a Statutory Probate Court,83 the court will appoint a court investigator.s1 The investigator meets with the proposed ward, attorney of record, social workers, family members, and any other persons nec­ essary·to determine whether guardianship is the least restrictive manner in which to handle the case.85

The court investigator files a report with the court.86 In a contested case, the court investigator provides copies of his or her report and conclusions to the attorneys for the involved parties.87 If the applicant does not withdraw the appJication based on the

Kl See Tex. Gov. Code§ 25.0025. The Statutory Probate Courts arc courts in large metropoli­ tan areas in the slate. They have jurisdiction over their respective counties’ probate matters,

guardianship cases, and mental health commitments. They also have expansive jurisdiction to transfer virtua11y any civil matter which is related to an estate from the district, county, or statutory court in which the matter was filed to the Probate Court in which the estate is pending. Tex. Esl Code§ 34.001. As of May 14, 2015, 18 Statutory Probate Couirts existed in Texas, located in 10 of the largest counties in the slate: Bexar. Collin, Dallas, Denton, El Paso, GaJveston, Harris, Hidalgo, Tarrant, and Travis. William D. Pargaman, 2015 Texas Estate and Trust Legislative Update (Including Probate, Guardianships, Trusts, Powers of Attorney, and Other Related Matters), 2 (fexas Ac;sociation of Counties, 2015).

court investigator’s review and recommendation, the court appoints an attorney ad

!item to advocate for the alleged incapacitated individual.88

5-3:5.3 The Attorney Ad Litem

As we saw in Section 5-3:5.2, if ‘the applicant does not withdraw his or her application after receiving the court investigator’s report, the case will move forward. lf the pro­ posed ward is indeed incapacitated, he or she will need a legal representative. To fulfill that need, the court will appoint an attorney ad !item to serve as an advocate for the proposed ward and to protect his or her legal rights.89

As an initial matter. the attorney ad !item shall be provided copies of all of the current records in the guardianship case.00 Accordingly, he or she may have access to all of the proposed ward’s relevant medical, psychological, and inteHectual testing records.91

Next, the attorney ad litenz has certain duties. Foremost among these is the duty to conduct a meeting with the proposed ward.92 At this meeting, the ad /item will dis­ cuss with the proposed ward the law, the facts of the case, the grounds on which the applicant is seeking guardianship, and the legal options available (i_ncluding alterna­ tives to guardianship) .93 Further to that, before the hearing, the ad !item ,vill review the application for guardianship, the proposed ward’s certificates of current physical. medical, and intellectual examinations, and all of the proposed ward’s relevant medi­ cal, psychological, and intellectual testing records.9 It is standard practice for the ad litem to deny the need for a guardianship-even in cases where the need is obvious to everyone. Truth is, this is not necessarily a bad thing. It actually forces the appli­ cant to completely prove the proposed ward’s incapacity, and offers some protection against abuse of the guardianship system.

The attorney ad /item is paid out of the proposed ward’s funds.95 This is so even if the proposed ward did not want the guardianship, and even if the court decides a guardianship is not necessary.

5-3:5.4  The Interpreter

At the same time that the court appoints the attorney ad /item, it will also. if necessary, appoint a language interpreter or sign language interpreter to ensure effective com­ munications between tJ1e proposed ward and the attorney.%

5-3:5.5 The Guardian Ad Litem

lf the proposed ward is incapacitated, the court may appoint a guardian ad !item to represent the proposed ward’s interests.97 As an officer of the court, the guardian ad litem is charged with (1) investigating whether a guardianship is necessary for the proposed ward and (2) evaluating alternatives to guardianship supports and ser­ vices available to the proposed ward that would avoid the need for appointment of a guardian.931l1e guardian ad /item will then report his or her findings to the court.99 The guardian ad /item is entitled to compensation for his or her services, the costs of which are borne by tl1e ward’s estate.100

5-3:5.6 Proof of Need for Guardianship

At the court hearing, the applicant must prove that the proposed ward needs to have a guardian appointed for him or her. Thus, before appointing a guardian for a proposed ward, the court must find by clear and convincing evidence that:

  1. The proposed ward is an incapacitated person (i.e., he or she is unable, because of a mental or physical condition, to provide food, clothing, or shelter for him­ self or herself; provide for his or her own physical health; make responsible decisions; or manage his or her financial affairs101) .102
  2. It is in the proposed ward’s best interest to have the court appoint a guardian for him or her.103
  3. The proposed ward’s rights or property will be protected by the appointment of a guardian.101

As regards the court’s determination that the proposed ward is incapacitated, such determination must be based on recurring acts or occurrences in the preceding 6 months, and not by isolated instances of negligence or bad judgment.105

The court must also find by a preponderance of the evidence that:

  1. The court has venue of the case.106
  2. The person to be appointed guardian is eligible to act as guardian and is enti­ tled to appointment, or, if no eligible person entitled to appointment applies, the person appointed is a proper person to act as guardian.107
  3. The proposed ward:
  • is unable to care for himself or herself and to manage his or her property; or
  • lacks the capacity to do some, but not all, of the tasks necessary to care for himseli or herself or to manage his or her property.108

If the judge determines that the applicant has proved the existence of these facts, he or she will authorize the guardianship by signing an order appointing the guard­ ian.109 The order will name the guardian and the ward, and will state whether the guardian is of the estate or person of the ward, or both,110 and the amount of any bond required.111 The order becomes effective when the court’s clerk issues Letters of Guardianship to the guardian.112 Because this text concerns the elderly, we note that Texas law prohibits the court from using age as the sole factor for determining whether it should appoint a guardian for a proposed ward.113

5-3:5.7  Choice of Guardian

·when guardianship is the only alternative, the court has various choices. As an initial matter, the fact that an applicant has filed an application for guardianship does not guarantee that the court will appoint him or her guardian. Rather, before appointing a guardian, the court will make a reasonable effort to consider the proposed ward’s preference of the person to be appointed guardian and, to the extent consistent with other provisions of the law, will appoint such person guardian.11’1 Accordingly, if the proposed ward has designated someone to serve as guardian under a Declaration of Guardian, the court will appoint that person unless it determines that he or she either is disqualified from serving or would not serve the proposed ward’s best interests.115

5-3:5.7a Appointment According to Circumstances and Best Interests

In appointing a guardian, the court shall consider the circumstances and the incapac­ itated person’s best interests.116

5-3:5.7b Appointment Preferences

With this standard in mind, the court has an order of preference for appointing guard­ ians. If the incapacitated person did not make a Declaration of Guardian, the court will appoint his or her spouse as guardian-unless the spouse is somehow ineligible to serve.117 If the spouse is unavailable or ineligible to serve, the court shall appoint

any ..next of kin.”116 If no next of kin volunteers, the court shall appoint any eligible person to serve.119

5-3:5.7c Designation of Guardian by Surviving Parent

Texas also makes provision for the surviving parent of an incapacitated adult to desig­ nate a guardian for the incapacitated person by will or written declaration that would take effect if the parent either dies or becomes incapacitated.120 Of course, this would occur only in a situation where the parent had been appointed guardian of the inca­ pacitated person.121 ·while this would be a rare occurrence in an Elder Law setting, it is indeed possible, and a choice to be considered in the context of this book.

5-3:5.8 Disqualification of Guardian

A potential guardian could be disqualified from serving if the person:

  1. is under the age of 18 or otherwise incapacitated;122
  2. because of inexperience, lack of education, or some such reason, cannot assist the ward and cannot prudently manage and control the ward’s estate;123
  3. has engaged in “notoriously bad conduct” and has been convicted of one or more of a list of crimes including sexual offenses, crimes against children, and crimes against the elderly;124
  4. appears to be in conflict of interest with the proposed ward in that he or she is a party (or his or her parent is a party) to a lawsuit affecting the welfare of the proposed ward O,owever, the court may waive this disqualification if it deter­ mines that the proposed ward and the applicant for guardian are actually on the same side of the lawsuit, or it appoints a guardian ad /item to represent the interests of the proposed ward throughout the litigation of the proposed ward’s lawsuit claim) ;125
  5. owes money to the proposed ward, unless the debt is paid before the applicant gets appointed to be guardian;126
  6. asserts a claim adverse to the proposed ward or the proposed ward’s property;127
  7. is found to be unsuitable by the court;128
  8. is disqualified in a Declaration of Guardian;129
  • lacks the necessary certification to serve as guardian/]/)
  • is not a resident of Texas and has not filed with the court the name of a resi­ dent agent to accept service of process in all actions or proceedings relating to the guardianship;1J1 or
  • has committed family violence and is under a protective order issued under Chapter 85 of the Texas Family Code.132

5-3:5.9 Guardianship in Action

TI1e court order that appoints the guardian in effect spells out the powers given to the guardian. It states whether the guardian has financial powers (i.e., a guardian of the estate), medical and personal powers (guardian of the person), or both sets of authori­ ty.133 The ward retains any powers the court does not specifically give to the guardian.

As we noted in Section 5-3:5.6, the court’s order appointing a guardian indicates the amount of the bond the applicant must post. The truth is, the guardianship will not become effective until the applicant posts the bond and files an oath of office. The guardian must then prepare an initial inventory of the ward’s estate for review and approval by the court.

Thereafter, the court shall use reasonable diligence to determine whether the guardian is performing all of the duties required of him or her that relate to the ward.1J.1 On an annual basis, the court will determine whether the guardianship should be con­ tinued, modified, or terminated.135

The nature of the method used to make the determination will depend on the r of court in which the application for guardianship was filed. If the review is conduc in a statutory probate court, the court may review a report prepared by a court in tigator, guardian ad !item, or court visitor; conduct a hearing; or review an annu.

account prepared by the guardian of the estate or a report prepared by the guardian of the person.136 Regardless of the court’s choice, the guardian of the estate shall each year file an annual account of the estate with the court, the first account being due no later than the 60th day after the first anniversary of the date of the imposition of the guardianship. 137 The account will list all claims against the estate presented to the guardian during the period covered by the accounting,138 and specify how the guard­ ian has disposed of those claims.139 The annual account must also list all of the ward’s property and carefully account for the initial property, and any additions or changes thereto.1-1°

Meanwhile, the guardian of the person must submit an annual report to the court. This report will detail information such as the ward’s visits to doctors, dentists, and other medical personnel during the year, funds expended for the ward’s education, health. clothing, or religious exercises during the year, and whether and how often the guardian has had to file for emergency detention of the ward during the year.J.\l

Failure by the guardian to file either the accounting or the report is a very serious breach and can be punished very severely by the court. l11e court can order the guardian to submit the accounting (or report), and, unless the court finds the guard­ ian had good cause to not file the document in a timely manner, it could revoke the guardian’s letters of guardianship, fine him or her up to $1,000, or revoke his or her letters of guardianship and fine him or her up to $1,000.1’12

5-3:5.10 Terminating Guardianship

1n the context of Elder Law, guardianship can end in two ways: the ward regains capacity or the ward dies.113 I.f either of these events occurs, the guardianship is no longer necessary. How does someone go about ending a guardianship that is no lon­ ger necessary?

5-3:5. lOa Termination or Modification of Guardianship Because the Ward Has Regained Partial or Full Capacity

If the ward has regained capacity, anyone interested in the ward’s well-being (includ­ ing the ward) can file a formal written application asking the court to hold a hearing about his or her present condition, with a view to the court finding that the ward has either completely regained capacity or, at the very least, regained some of his or her capacity.1′-1 The court could then find that (1) the ward is no longer an incapacitated person and could therefore order the settlement and closing of the guardianship;1’15

(2) the ward lacks the capacity to do some or all of the tasks necessary to provide food, clothing, or shelter for himself or herself, to care for his or her own physical health, or to manage his or her own financial affairs, and would therefore benefit from the court granting additional powers or duties to the guardian;i◄0 or (3) the ward has the capacity to do some, but not all, of the tasks necessary to provide food, clothing, or shelter for himself or herself, to care for his or her own physical health, or to manage his or her own financial affairs, whereupon the court would (a) limit the guardian’s powers or duties and (b) permit the ward to care for himself or herself or to manage the ward’s own financial affairs, commensurate with the ward’s ability.117

The law also allows the ward to start the process by simply writing an informal letter to the court.1-1s Upon receiving the letter, the court must appoint either a court investigator or a guardian ad litem to investigate the ward’s circumstances-including

MANAGING RESOURCES or THE ELDERLY                                                              97

any circumstances specifically alleged in the letter-to determine whether (1) the ward is no longer an incapacitated person or (2) a modification of the guardianship is necessary.149111e appointed party shall then file with the court a report of the investi­ gation’s findings and conclusions. If the party determines that it is in the best interest of the ward to terminate or modify the guardianship, he or she will file an application seeking such a result.150

Of course, before all this can happen, proper notice of the pending action must be served on the guardian and, if the ward is not the one serving the application, notice must be served on him or her also.151

In making its decision on whether the ward has been restored to partial or full capacity, the court is required to receive medical evidence that describes the ward’s current medical condition. 1l1e timely filed physician’s letter or certificate must describe the nature and degree of the ward’s incapacity. and state whether, in the physician’s opinion, the ward is either able or unable to (1) provide food for himself or herself, (2) care for his or her own physical health, and (3) manage his or her own financial affairs.152 The certificate or letter must also provide an outlook for the ward’s future mental and physical health, paying particular attention to whether any indicia exists to conclude that the ward may someday suffer from senility.153

Throughout the hearing, the burden of proof remains on the party who filed the application for the hearing.15-1

5-3:5.1Ob Termination of Guardianship Because the Ward Has Died

If the ward dies, the guardianship estate must be settled and closed.155 Usually, this involves the wrapping up of the ward’s earthly affairs and the filing by the guardian of a final accounting with the court. However, before one can get to that stage, it is first necessary for the guardian of the estate to, subject to the court’s approval, make all funeral arrangements and pay the funeral expenses and all other debts out of the deceased ward’s estate.156 If the probate court has appointed a personal repre­ sentative to oversee the deceased ward’s estate, this personal representative will move the court to have the guardian submit a final account for settlement of the deceased ward’s estate.157

The court will also require that either the guardian or the personal representative sell all estate properties that need selling, pay all taxes due, and distribute the estate to the rightful heirs before the final accounting is submitted and the estate may be closed.158 To ensure that the guardian of the estate renders a true final accounting, the

law requires that he or she will submit a verified account for final settlement of the ward’s estate.159 After the court has accepted the accounting and the guardian no lon­ ger possesses any of the ward’s property, the court shall enter an order discharging the guardian and closing the guardianship estate.100

5-3:6 Certification of Guardianship Attorneys

Attorneys who represent clients in guardianship proceedings must be certified by the State Bar of Texas or the state bar’s designee as having successfully cornp,leted a course of study in guardianship law and procedure sponsored by the state bar or the state bar’s designee.161 The course of study must cover at least 4 credit hou.rs, inducting 1 hour on alternatives to guardianship and supports and services available to proposed wards.162

Attorneys receive initial certification for 2 years. After an attorney has been certi­ fied for two consecutive 2-year periods, he or she will be certified for the next 4 years, with the certification being renewable every 4 years thereafter.163

5-4 Community Administration

If a married couple has nothing but community property and one spouse becomes incapacitated, the other spouse can avoid guardianship with a process called “com­ munity administration.”164 Of course, this does not negate the guardianship avoidance vehicles of durable powers of attorney or revocable living trusts executed before one of the spouses becomes incapacitated. However, in the event the incapacitated spouse did not prepare any estate planning documents before becoming incapacitated, all is not lost. Upon the judge ruling that one spouse is incapacitated. the other spouse becomes the ”community administrator.J’165 This healthy spouse, in his or her capacity as surviving partner of the marital partnership, acquires full power to manage, control, and dispose of the entire community estate, including the part that the incapacitated spouse would legally have the right to manage had he or she not been incapacitated.1bo Moreover, the spouse who is not incapacitated manages the entire community estate without an administration; the law presumes that he or she is suitable and qualified to serve as community administrator.167

That being said, the appointment of one spouse as community administrator does not affect the duties and obligations of the spouses toward each other; including the duty to support each other as spouses, and the rights of creditors of either spouse.1M

However, the healthy spouse can sell the entire community estate if he or she so desires.109

5-4:1 Duties of the Community Administrator

Unlike guardianship, community administration does not require the posting of bond by the healthy spouse. However, the court may, upon its own motion or upon the motion of an interested party, order the community administrator to file a verified, full, and detailed inventory and appraisement of the community estate and any income earned thereon.170 This inventory and appraisement must be prepared in the same form and manner as similar reports filed by guardians, and must be filed with the court no later than 90 days after the date the order is issued.171

At any time after the 15th month following the date on which the court adjudicated the incapacitated spouse to be incapacitated, the court may, upon its own motion or upon the motion of an interested party, order the community administrator to file an account of any community property in the community estate, and any income

earned thereon since the declaration of the spouse’s incapacitym.   The account must

be similar in form and manner to that required of guardians under the Texas Estates Code, and must be filed with the court no later than 60 days after the court issued its order.173 Thereafter, the court may require annual accountings from the community administrator.174

5-4:2 Disclosure of Lawsuits by Community Administrator

The community administrator is required to report to the court any lawsuit that names the incapacitated spouse as a defendant.175 This specifically includes a divorce proceeding brought by the healthy spouse-the community administrator-to termi­ nate the marriage.176

5-4   :3 Removal of Community Administrator

The law provides four reasons upon which the court may remove the community administrator. These are as follows:

  1. The community administrator fails to comply with a court order for an inven­ tory and appraisement or an accounting.177
  2. Sufficient grounds exist to show that the community administrator has embez­ zled or misapplied, or is about to embezzle or misapply, all or part of the com­ munity estate.178

).

  • 171e community administrator has been found guilty of gross misconduct or gross mismanagement in the performance of his or her duties as community administrator.1;9
  • The community administrator becomes incapacitated, is sentenced to prison, or otherwise becomes legally incapacitated from properly performing his or her functions as community administrator.1ro

In a proceeding to remove the community administrator, the court must appoint an attorney ad !item to represent the interests of the incapacitated spouse.181 This attor­ ney ad litem may then demand an accounting and/or an inventory and appraisement from the community administrator.182 The community administrator is obligated to respond within 60 days of receiving the request.1a1

5-4   :4 Appointment of Guardian of the Estate to Replace Community Administrator

If the court removes the healthy spouse as the community administrator, it will. after considering the financial circumstances of the couple, appoint a guardian of the estate for the incapacitated spouse and order the healthy spouse to turn over to the guardian one-half of the community estate that is subject to both spouses’ joint management, control, and disposition.1s-i The court will then authorize the guardian of the estate of the incapacitated spouse to administer that property, along with any community property that was subject to the incapacitated spouse’s sole management, control. and disposition, as well as any of the incapacitated spouse’s separate property.185 From henceforth, any community property administered by the guardian of the incapaci­ tated spouse’s estate will be considered the incapacitated spouse’s community prop­ erty, subject to his or her sole management, control, and disposition.186

Meanwhile, the healthy spouse will continue to administer his or her own sepa­ rate property, any community property that is subject to his or her sole management, control, or disposition, and any portion of the spouse’s community property subject to their joint management, control, or disposition that was left over after the spouse turned over the incapacitated spouse’s portion to his or her guardian of the estate.187 From then onward, the non-incapacitated spouse will administer these assets as his or her community property, subject to his or her sole management, control, and disposi­ tion.188

5-4  :5 Incapacitated Spouse’s Separate Property

Community administration is designed to provide for the management and adminis­ tration of community property. \Vhen an incapacitated spouse has separate property, the court will appoint a guardian of the estate to administer that spouse’s separate property.189 The court may appoint the healthy spouse or some other person or entity according to the order of preference provided in the Texas Estates Code190 to serve as guardian, to administer only the separate property of the incapacitated spouse.191 The appointment of this guardian of the estate does not in any way interfere with the right of the healthy spouse, in his or her role as community administrator, to manage, control, and dispose of the entire community estate.192

5-5      Social Security Representative Payee

A Social Security Representative Payee is a person or organization that receives Social Security benefits on behalf of another person.193 This representative payee controls the funds. 1l1e payee’s main duties are to use the Social Security benefits to pay for the current and future needs of the beneficiary, and to properly save any benefits not needed to meet current needs. While performing this delicate balance, the payee must also keep meticulous records of expenses. Whenever the Social Security Admin­ istration requests an accounting, the payee must provide one to the Administration showing how he or she either saved this amount of money or used it for the person’s benefit. This being the case, the designation “Representative Payee” carries tremen­ dous responsibility, a breach of which could have dire consequences.194

It is important to note that being an authorized representative, having power of attorney, or having a joint bank account with the Social Security beneficiary is not the same as being a representative payee. While these arrangements give the designee much power, they do not give him or her legal authority to negotiate and manage a beneficiary’s Social Security and/or Supplemental Security Income (SSD benefits. To become a representative payee, one must apply for the position and be appointed by the Social Security Administration.

5-5  :1 Becoming a Representative Payee

In the context of Elder Law, someone may become a representative payee for an el­ derly Social Security beneficiary if the relevant Social Security office in his or her district determines that it would be in the eider’s best interest to pay the benefits to the representative payee to use or save for the beneficiary’s benefit.195 A person who senses the need to become a representative payee for a beneficiary should contact the nearest Social Security office to apply for such appointment The applicant must com­ plete Form SSA-11 (Request to be Selected as Payee) and provide the Administration with documents proving his or her identity.

Upon receiving the application, the Social Security office conducts an investigation of the applicant to determine his or her qualification to become a representative pay­ ee.1% To the extent possible, the investigation should include a face-to-face meeting between the applicant and a Social Security staffer.197 Uthe investigation reveals that the applicant has in the past been involved in any type of Social Security fraud, the statute demands that the application be denied.198

Prior to the payment of benefits to the representative payee, the Social Security office is required to give written notice to the beneficiary of its appointment of a reir resentative payee for him or her.199 Upon receiving this notice, the beneficiary-or his or her guardian-may acquiesce in the determination, or, if he or she disagrees, may

(1) appeal the determination that he or she needs a representative payee, (2) appeal the designation of the person appointed representative payee to fill that position, or

(3) seek a review of the evidence upon which the Social Security office made its deter­ mination and submit additional evidence.200

5-5  :2 Duties of the Representative Payee

If the designee is able to withstand any challenges raised by the beneficiary and/or his or her guardian, the designee will go on to serve as the beneficiary’s representa­ tive payee. \Ve noted in Section fr5 that the payee’s main duties are to use the Social Security benefits to pay for the current and future needs of the beneficiary, and to properly save any benefits not needed to meet current needs.201 Should the payee mis­ use the funds-by converting the benefit payment or any part thereof for the use and benefit of someone other than the elderly beneficiary202-the Social Security Adminis­ tration will remove this person as a representative payee, and will require restitution from him or her.203

5-6      Account Management

The elderly can also manage their resources through the accounts they hold at banks, savings banks, and credit unions. Although these accounts may have all sorts of fancy­ sounding names, what is really important to the elder is not the name of the account, but the manner in which the account is legally classified.

5-6  :1 Types of Accounts

For a bank account to truly serve a resource management function for an elderly per­ son, the elder should consider two issues: access and ownership. Some accounts give only the elder access to the funds in the account; some give access to multiple parties.

\Vhile the elderly person’s Last Will and Testament determines ownership of some accounts following the elder’s death, in some others ownership is determined by the

42 U.S. Code § 1007 – (Social Security) Representative payees

account type.201 Having determined the answers to his or her questions on ownership ru1d access, the elder can choose among a variety of accounts available in Texas.

5-6   :1.1 Single Party Account Without Pay-on-Death (POD) Beneficiary

With this type of account, while the elderly person is alive, he or she is the only person who can access the funds therein. He or she owns the account. Upon the elderly per­ son’s death, the financial institution will freeze the account until the decedent’s Last Will and Testament or intestate estate is probated and the estate’s personal represen­ tative provides evidence of the person entitled to receive the funds therein.205

5-6:1.2 Single Party Account With Pay-on-Death Beneficiary

With this type of account, the elderly person owns the account and, while he or she is alive, is the only person with authority to access it. Upon the eider’s death. however, the person or persons named on the account card as the POD beneficiary or bene­ ficiaries become the owner(s) of the account.2«iThe POD arrangement supersedes anything the elder may say about the account in his or her Last Will and Testament. The value of the account is not included in the decedent’s estate.207

5-6:1.3 Multiple Party Accounts

Like all other accounts people hold in financial institutions, multiple party accounts are contractual arrangements for the deposit of money with these institutions. The difference here is that the financial institution will recognize more than one party a5 owner of the account. The disposition of the funds remaining in these accounts upon the death of one of the depositors depends on the type of account, the account contract.

These multiple party accounts are important non-probate transfer mechanisms. They are widely used in Texas, are easy to understand, and are inexpensive to obtain. The Texas Estates Code recognizes the validity of these accounts and their power to transmit property upon the death of one of the depositors. In particular, Texas recog­ nizes five types of multiple party accounts: (1) multiple party account without right of survivorship, (2) multiple party account with right of survivorship, (3) multiple party account with right of survivorship and payable on death designation, (4) convenience account, and (5) trust account.208

5-6:1.3a Multiple Party Account Without Right of Survivorship

This type of account is commonly referred to as a ”joint account.” During the lifetime of all parties to the account, the account belongs to the parties in proportion to the

net contributions by each party unless clear and convincing evidence exists that the parties intended otherwise.209·what this means is that each party is entitled to what he or she deposited, minus what he or she withdrew, plus a proportionate share of the interest earned by the account.110 However, the financial institution may pay any sum in the account to anyone named as an owner thereof at any time.211 “When one of the

parties dies, his or her net contributions to the account pass according to the terms of his or her Last ·wm and Testament or (in the absence of a Last Will and Testament)

by the laws of intestacy.212

5-6:l.3b Multiple Party Account With Right of Survivorship

This type of account has all the features of the multiple party account without right of survivorship except that when an account holder dies, his or her share of the account passes to the surviving owners.213 However, this is so only because the parties to the account have a written agreement-signed by the party who has died-establishing the right of survivorship in the joint account 214 The agreement should contain lan­ guage substantially similar to the following:

On the death of one party to a joint account, all sums in the account on the date of the death vest in and belong to the surviving party as his or her separate property and estate.215

No probate is necessary for the survivors to access the funds in the account. Nei­ ther a Last ·wm and Testament nor the inheritance laws control the account. However, the Internal Revenue Service may seize the account to settle the tax debt of any of the owners.

5-6:1.3c Multiple Party Account With Right of Survivorship and Payable on Death Provision

The parties to this account own the account in proportion to their net contributions to it. The financial institution may pay any sum in the account to any of the parties at any time. On the death of the last surviving party, ownership of the account passes to the POD beneficiary or beneficiaries.216

5-6:1.3d Convenience Account

Two or more names are on such an account-the depositor(s) and the co-signer(s). One or mo.re co-signers (referred to as ”convenience signers”) may make account transactions for one or more of the depositors. A convenience signer does not own the

.

account.217 He or she may not pledge or otherwise create a security interest in a con­ venience account or any part thereof.218 On the death of the last surviving depositor, ownership of the account passes as part of that depositor’s estate under the terms of his or her Last Will and Testament or by intestacy.219

A financial institution is completely released from liability for a payment made from a convenience account before the financial institution received notice in writing by a depositor not to make the payment in accordance with the terms of the account.220

Creditors or the Internal Revenue Service may seize this account for a debt owed by the owner or owners thereof.221

5-6:1.3e Trust Account

A trust account is an account with one or more persons named as trustee for the funds, and one or more persons named as beneficiary of those funds. During the life of the creator of the trust (referred to as the grantor or settlor), the funds belong to the trustee.222 The beneficiary or beneficiaries have no rights to the account. The trustee may withdraw funds from the account 2′-‘…3 A beneficiary may not withdraw funds from the account before all trustees are deceased.224 Upon the death of the last surviving trustee, ownership of the account passes to the beneficiary or beneficiaries.225 Accord­ ingly, the trust account is not a part of the trustee’s estate and does not pass under the trustee’s Last \Vill and Testament or by intestacy unless the trustee survives all of the beneficiaries and all of the other trustees.226

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Power of Attorney

Managing Resources of the Elderly

…

Walter sets himself to doing some research. He discovers six legal techniques he can use to get a firm grip on his life and property should he suffer a disability:

  1. power of attorney;
  2. guardianship;
  3. community property administration;
  4. Social Security Representative
  5. Payee;account management; and
  6. a trust.

The Power of Attorney

 Subtitle P  Durable Powers of Attorney

With a power of attorney, an individual selects a representative to assist him or her with financial and property matters.1 The individual (“the principal”) delegates to the representative (”the agent” or “attorney in fact”) whatever powers the principal feels the agent will need to properly manage the property.

Many powers of attorney are written to grant very broad powers to the agent. However, the principal may, if he or she wishes, grant very narrow powers to the agent, and be very specific in detailing what the agent is to do. Generally, however, for estate planning purposes, the powers granted are extensive, allowing the agent great flexibility.

5-2:1 Types of Powers of Attorney

Financial powers of attorney may be broken down into two types: ”regular” and ”durable.'”

5-2:1.1 Regular Power of Attorney

A regular power of attorney is based on the common law of agency and on statutes about agency. Pursuant to this law, a principal appoints an agent whose authority can be exercised only while the principal has capacity to undertake the same action. Hence, if the principal cannot do something for himself or herself, the agent cannot do it either. Stated another way, if the principal becomes disabled in any way, the agent can no longer act on the principal’s behalf. This is problematic in the estate planning context Mer all, if the principal becomes disabled, he or she truly needs someone to act on his or her behalf. Alas, this is just when the regular power of attorney vanishes!

Dissatisfied, states began devising ways to create a document whereby an agent would be able to act on behalf of a principal who lacked competency. In 1954, Virginia became the first state to authorize a durable power of attorney, which provided that the agent retained the authority to act even if the principal lacked competency.2

5-2:1.2  Durable Power of Attorney

The most significant difference between a regular power of attorney and a durable power of attorney, then, is the fo11owing: A durable power of attorney remains in force even if the principal becomes disabled.3 Moreover, a durable power of attorney does not lapse because of the passage of time unless the instrument creating the power specifically states a tjme limitation.4 Indeed, unless the principal revokes it or a court of competent jurisdiction acts to effectively revoke it, the power of attorney remains in effect and continues to work until the principa1’s death.

However, the common law did not create lhe durable power of attorney; it was cre­ ated by statute. Hence, to create and use a durable power of attorney, the client-or his or her attorney-must carefully follow the instructions provided by the statute.

5-2:2 Fundamental Requirements of the Durable Power of Attorney

The Texas statute5 requires few formalities to create a durable power of attorney. Essentially, the principal must “write out” his or her instructions, date it, sign it, and have it notarized.GThe statute does not require that the instrument have any witnesses.7

To assist people in creating the durable power of attorney, the legislature created a form called the “Statutory Durable Power of Attorney.”8 A copy of this form is con­ tained in Appendix 7. However, the form and its wording are not exdusive, and attor­ neys are free to draw up their own or to use other formats, so long as the wording used complies substantially with the wording prescribed by Texas Estates Code§ 752.051.9

The statute does not require that the durable power of attorney be filed with the County Clerk. However, if the agent uses the power with respect to a real property transaction, he or she will then need to record the power of attorney with the County Clerk’s office in the county where the real property is located.10 The 2015 Texas Leg­ islature mandated that such a power be filed no later than the 30th day after the filing of the real property instrument.11 The statute is silent regarding the consequences for a failure to file.

A principal can use the durable power of attorney to grant a wide variety of powers to his or her agent. The agent could have the power to, on the principal’s behalf, enter into transactions ranging from personal and real property transactions to foreign interests.12 However, to grant. these powers to the agent, the principal must specifically mention them in the instrument. When using the statutory durable power of attorney form, the principal must ensure that he or she initializes the line to the left of each power he or she is granting to the agent.13 The principal’s failure to initialize the line tr the left of each enumerated power will be construed as an indication that. the principa did not wish to grant this power to the agent 14

5-2:3 Springing Durable Power of Attorney

Unless the instrument states otherwise, a power of attorney takes effect upon its exe­ cution.15 The Texas statute changes that; it allows principals to choose whether the power takes immediate effect,iG or whet.her the agent’s authority to act takes effect only if the principal loses the ability to act for himself or herself-that is, if he or she

becomes disabled or incapacitatedY This latter form of durable power of attorney is called a “springing power of attorney.”

TI1e advent of the statutori} , blessed springing power of attorney raises a valid question: If someone executed a durable power of attorney prior to its being autho­ rized by the Durable Power of Attorney Act in 1993, is that power of attorney valid? If the principal signed a durable power of attorney with a springing power in 1991 and suffers a disability today, is the springing power effective notwithstanding the fact that it was created prior to its being authorized by law?

In Comerica Bank v. Texas Commerce Bank,18 the Court of Appeals in Texarkana held that although no explicit statute authorizing springing powers of attorney existed prior to 1993, such powers were indeed legal. Notwithstanding the court’s authoriza­ tion of these pre-1993 springing powers of attorney, it is advisable that someone with such a power of attorney execute a current durable power of attorney based on the Texas Durable Power of Attorney Act. This would save the individual from possibly going to court to determine whether his or her particular power is valid.

:4 Revocation of the Power of Attorney

A durable power of attorney does not lapse because of passage of time unless the instrument creating the power specifically states a time limitation.1!1 However, other circumstances can give rise to a termination of the power:

  1. The principal dies.20
  2. Where the principal appointed his or her spouse as agent (or a court appointed the spouse as agent) and the principal and agent divorce or their marriage is annulled, the power of attorney terminates as a matter of law unless the instru­ ment creating the power of attorney expressly states otherwise.21
  3. A guardian of the principal’s estate is appointed by a court sitting in the princi­ pal’s domicile.22

Notwithstanding the aforementioned provisions, a revocation of a durable power of attorney is not effectjve as to a third party relying on the power of attorney until the third party receives actual notice of the revocation.23 Also, the filing of a voluntary or involuntary petition in a bankruptcy proceeding on behalf of the principal does not revoke or terminate the power of attorney.21

Comerica Bank-Texas v. Texas Commerce Bank, 2 SW 3d 723 – Tex: Court of Appeals, 6th Dist. 1999 cited in  Mayfield v. Worthen, Tex: Court of Appeals, 1st Dist. 2021

 5-2:5 The Agent’s Fiduciary Responsibilities

The Durable Power of Attorney Act is clear: The agent is a fiduciary with a duty to account for actions he or she takes under the power of attorney.25 Accordingly, the agent is obligated to perform his or her duties pursuant to the standards of good faith and trustworthiness.26 Should he or she fail to do that, the principal may revoke the power of attorney and/or seek restitution from the agent for misused funds or other proper ty.27

Even in situations where the principal lacks mental capacity, Texas law provides an avenue whereby the agent can be removed. U, after a principal has executed a durable power of attorney, a court sitting in the principal’s domicile is convinced that the agent has been abusing his or her power, the court may appoint a guardian of the principal’s estate–either permanent or temporary-at which time the powers of the agent will terminate and the agent will turn over to the guardian all of the principal’s property in his or her possession.28

5-2:6 Capacity to Execute a Power of Attorney

Texas has no statutory requirement that a principal possess a certain level of capacity in order to execute a power of attorney. However, Texas courts appear to apply the capacity requirements for entering into contracts for determining whether principals had the requisite capacity to execute powers of attorney.29 Under this standard, some­ one who challenges a principal’s mental capacity when signing a power of attorney has the burden of showing that the principal ”did not understand the nature or conse­ quences of his act at the moment the power of attorney was executed.”30

26 Vaughn E. James, ‘The Alzheimer’s Advisor:A Caregiver’s Guide to Dealing With the Tough Legal and Practical Issues, 64 (AMACOM Books 2009).

28J See br re Estate of Vackar, 345 S.W.3d 588, 597 (fex. App.-San Antonio 2011, reh’g over­ ruled).

—noting a person lacks mental capacity to execute a power of attorney if the person does not understand the nature or consequences of executing the instrument

– in Guardianship of AE, 2018

:n re Estate of Vackar, 345 S.W.3cl 588,597 (fex. App.-San Antonio 2011, relz’g ovemlle<f) (citing Tomli11son v.jo11es, 677 S.W.2d 490. 492-93 lTcx. 1984); Mandell & Wright v. Thomas. 441 S.W.2cl 841,845 lTex. 19691).

Mental Capacity A person seeking to set aside a power of attorney based on the executor’s lack of mental capacity must show that the executor did not understand the nature or consequences of his act at the moment the power of attorney was executed. See Tomlinson v. Jones, 677 S.W.2d 490, 492-93 (Tex.1984); Mandell & Wright v. Thomas, 441 S.W.2d 841, 845 (Tex.1969). Mental capacity may be shown by circumstantial evidence of: (1) a person’s outward conduct that manifests an inward condition; (2) pre-existing external circumstances tending to produce a special mental condition; and (3) a prior or subsequent mental condition. Bach v. Hudson, 596 S.W.2d 673, 676 (Tex.Civ.App.-Corpus Christi 1980, no writ). The issue of whether a person has mental capacity is ordinarily a question of fact for the jury to decide. In re Estate of Robinson, 140 S.W.3d 782, 793 (Tex.App.-Corpus Christi 2004, pet. denied).

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Legal Implications of Dementia and Alzheimer’s Disease

See the Alzheimer’s Association website, Alzheimer’s & Dementia-Stages of Alzheimer’s, https://www.alz.org/alzheimers-dementia/stages

Generally, Alzheimer’s patients suffer from an impaired ability to make decision This impairment has serious consequences for the patient and his or her family mem­ beers and caregivers. From a legal standpoint, family members and caregivers must be concerned with whether the patient possesses the mental capacity to engage in certain transactions or make certain decisions or has the legal competency to retain his or her autonomy.

An autonomous individual has a number of different capacities, including the legal capacity to:

  • enter into a contract’
  • prepare (or have prepared on his or her behalf) and execute a Last Will and Testament.
  • make gifts of his or her property.
  • consent to medical treatment; and
  • manage his or her financial or personal affairs or appoint agents to make such management decisions on his or her behalf.

Each of these capacities involves a distinct combination of functional abilities and skills. Accordingly, the mental capacity-or level of alertness or functional ability-for each one is different. Not surprisingly, the legal capacity for each task is also different.

Testamentary Capacity

To execute a Last Will and Testament, a testator needs to be of “sound mind.”35 This means that the testator understands the Last Will and Testament and the effect of executing such an instrument; knows the general nature and extent of his or her property, the person or persons to whom he or she wishes to give the property, and the person or persons dependent upon him or her for support; and must be able to keep the above-mentioned information in his or her mind long enough for him or her to understand how they relate to each other, and then to form a reasonable judgment about how he or she wishes to dispose of his or her property when he or she dies.36 At probate or in a will contest, the proponent of a will bears the burden to prove the testator’s capacity.37 Testamentary capacity is a lower standard than contractual capacity. Texas law does not require testators to be capable of managing all of their affairs or daily business transactions. What is important to the execution is the time of execution: A testator may lack capacity immediately before and immediately after signing a will. but not at the time of execution.33 However, the testator’s capacity can be negated by a showing that he or she suffered from an “insane delusion”-an irrational perception of particular persons or events-if the delusion materially affects the Last Will and Testament 39 Generally speaking, then, for the Last Will and Testament to be valid and for the testator to be considered as having had the requisite testamentary capacity at the time he or she executed the instrument, the testator must “know” and “understand” facts, and must possess knowledge or understanding based on reali1ty material to the disposition.

Capacity to Contract

Because this text is about elders (sometimes referred to as “seniors” or “senior citizens”), we shall limit our discussion of the capacity to contract to the capacity of elders to enter into contracts.

In Texas as elsewhere, only people with the requisite mental capacity may enter into valid contracts. That having been said, we note that all Texans who enter into contracts are covered by a presumption of competency.28 Unless a court of competent jurisdiction has adjudicated someone incompetent, that person retains all his or her rights under Texas law and has full legal capacity to enter into a contract.29

But what, exactly, does “capacity to enter into a contract” entail? The Texas legislature has thus far failed to address the matter. Meanwhile, Texas courts have developed a definition: A contracting party has capacity for executing a contract if the person can appreciate the effect of what he or she is doing and understands the nature and consequences of his or her acts and the business he or she is transacting.30

Notwithstanding this development, the courts address the matter of mental capacity to contract on a case-by-case basis. The more complicated a transaction, the higher the level of mental capacity required to engage in the transaction. Accordingly, someone who cannot understand a highly complex transaction-and thus would lack the capacity for entering into a contract concerning this transaction-may still have the requisite capacity to engage in simpler contracts.31

In analyzing mental capacity to contract, Texas courts have also said that we can look to certain circumstantial evidence to assess whether a party had capacity at the time he or she entered into the contract.32 This circumstantial evidence includes: (1) the person’s outward conduct and whether it is manifesting an inward and causing condition; (2) any pre-existing external circumstances that tend to produce a special mental condition; and (3) the prior or subsequent existence of a mental condition from which the person’s mental capacity (or incapacity) at the time in question may be inferred.33 However, the courts have been rather loosely applying these factors.l-1 and one would do well to proceed with caution.

Donative Capacity

It is easy-too easy-for an unscrupulous person to take advantage of an elderly per­ son suffering from Alzheimer’s disease or some other form of dementia and then somehow get that person to make him or her a large gift. To prevent this, it would make sense for the law to establish rules for donative capacity beyond the realm of wills.

To date, neither the Texas legislature nor any Texas court has articulated any rules governing donative capacity. However, some states have adopted a higher standard for donative capacity than for testamentary capacity, requiring that the donor knows the gift to be irrevocable and that it would result in a reduction of the donor’s assets or estate. To the extent Texas follows these standards, donative capacity in Texas would require a higher degree of cognition and understanding than contractual capacity, if only because, unlike a contract, it is difficult to evaluate whether a donation is “fair.”·11

Capacity to Consent to Medical Treatment

Capacity in health care is based on the doctrine of “informed consent.” This concept dictates that patients have the ultimate right to prevent unauthorized contact with

their bodies, and that health care providers have a duty to disclose relevant information to allow their patients to make informed decisions. Consent to treatment must be competent, voluntary, and informed. Though persons may have mental capacity, if their decisions were either involuntary or unknowing, they may not meet the standard.’12

Power of Attorney

Texas has no statutory requirement regarding the requisite capacity for executing a power of attorney. However, Texas courts appear to use the contract standard for determining whether principals had the requisite capacity to execute powers of attorney. 3 That being said. someone who challenges the principal’s mental capacity when signing the power of attorney has the burden of showing that the principal “did not understand the nature or consequences of his [or her] act at the moment the power of attorney was executed.’ 4

Estate Planning for Patients With Alzheimer’s Disease and Other Forms of Dementia

People typically put off estate planning until they experience a health crisis. Because of the emotional toll of the ongoing crisis, such a time is not best for engaging in estate planning. When the potential client is suffering from Alzheimer’s disease or some other form of dementia, the memory loss and other conditions that accompany the disease make it extremely difficult for an attorney called upon to assist the individual to put together an estate plan.

That said, to the extent the individual has recently begun exhibiting symptoms of Alzheimer’s disease-which would indicate that the disease is probably in its early stage-his or her family members, acting on the patient’s behalf, would most likely be the ones who contacted the attorney to discuss the issue of estate planning. Of course, this raises ethical issues, ranging from a determination of who is the client to conflicts of interest issues. Assuming the attorney can overcome the ethical issues, he or she can develop an estate plan that should include at least three parts-a durable power of attorney, a Last Will and Testament, and a set of medical advance directives. Depending on the value and complexity of the patient’s assets and the availability of funds to pay for it, the plan may also include a revocable living trust.

The Texas Durable Power of Attorney

Like all other durable power of attorney statutes, the Texas statute allows an adult principal to designate another person as attorney in fact or agent to make financial decisions on the principal’s behalf.15 The Texas statute provides that the power may be either “regular” or “springing.” The “regular” durable power of attorney grants authority to the agent to act as soon as the principal executes the document.16 TI1e “springing” power of attorney grants the agent authority to act only if the principal

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Texas Elder Rights, Marital Issues, and the Homestead

Financial Management

Being elderly does not rob someone of the ability to manage his or her finances. Accordingly, the Texas Bill of Rights for the Elderly provides that elderly Texans shall have the right to either manage their finances themselves or appoint a surrogate decision maker to manage in their stead.37 Pursuant to the statute:

  1. An elderly individual may manage his or her personal affairs and may in writing authorize another person to manage his or her money.
  2. The elderly individual may choose the manner in which his or her money is managed, including a money management program, a representative payee program. a financial durable power of attorney, a trust, or some other method. Indeed, the elderly individual is free to choose the least restrictive of these methods.
  3. When the elderly principal (or his or her representative) requests, tile money manager shall make available the related financial records and provide an accounting of the money.
  4. An elderly individual’s designation of another person to manage his or her money does not affect such individual’s ability to exercise another right described in the law. U an elderly individual is unable to designate another per­ son to manage his or her affairs, a court of competent jurisdiction will designate a guardian to do so? The guardian is then required to manage the elderly individual’s money in accordance with the provisions of the Texas Estates Code and other applicable laws.
  5. An elderly individual may retain and use personal possessions, including cloth­ i11g and furnishings, as space permits. The number of personal possessions may he limited based on the health and safety of other individuals.

 Medical Decisions

  1. Just as the elderly individual can manage his or her financial decisions, the elderly individual can make his or her own medical decisions. The Bill of Rights contains several provisions ensuring that the elderly have control of their medical decisions.:’) Pursuant to the Bill of Rights, then:
  2. A service provider must fully inform an elderly individual. in language the individual can understand, of his or her total medical condition, and shall notify the patient whenever a significant change in his or her medical condition occurs.
  3. An elderly individual may choose and retain a personal physician and is entitled to be fully informed in advance about treatment or care that may affect the individual’s well-being.
  4. An elderly individual may refuse medical treatment after the elderly individual:is advised by the service provider of the possible consequences of refusing treatment; and The elderly individual acknowledges that he or she clearly understands the consequences of ref using treatment.
  5. An elderly individual has the right to be free from physical and mental abuse, including corporal punishment or physical or chemical restraints that are administered for the purpose of discipline or convenience and not required to treat the individual’s medical symptoms. 10
  6. Not later than the 30th day after the date the elderly individual is admitted for service, a service provider shall inform the individual: whether the individual is entitled to benefits under Medicare or Medicaid; and which items and services are covered by these benefits. including items or services for which the elderly individual may not be charged. ‘

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