Those Pesky Trusts! A Brief Primer on Terminating Unwanted Trusts

Estate planning attorneys often wax poetic about the multitude of advantages found in a simple trust instrument. They’re not wrong. A well-crafted trust is an excellent vehicle for addressing a client’s concerns under a variety of different circumstances. Clients may place assets in a trust for tax benefits, creditor and divorce protection, planning for incapacity, family dynamics and a host of other reasons.

Yet no trust exists without a level of complexity and sophistication. Every trust has a trustee who must fulfill strict fiduciary duties and carefully manage the trust assets for the beneficiaries. The terms for distributing property from the trust may involve difficult calculations or restrictive standards that are not easily met. In some cases, a trust instrument’s vague provisions may leave both the trustee and beneficiaries confused as to how to proceed with the trust administration. Eventually, these complexities may become overly burdensome. Life circumstances may also render the trust’s intended benefits and purpose unnecessary.

Whatever the reason, trustees and beneficiaries often find themselves stuck with a trust that no longer meets their needs. But many of these trusts are or have become irrevocable and cannot be unilaterally terminated. Trustees and beneficiaries should not despair, however. Texas law has recognized several different ways to modify or ultimately terminate those pesky trusts.

A. Uneconomical Trusts

The Texas Trust Code enables a trustee to terminate a trust whose assets are valued less than $50,000. The trustee must consider the purpose of the trust and the nature of the assets, and ultimately determine that the value of the assets is insufficient to match the costs of continued administration. A common example of this occurs when a trust established under the provisions of a deceased person’s will receives only minimal funding from the deceased’s estate. The amount held in trust often does not justify the time, effort, and cost in administering the trust.

B. Combining Separate Trusts

Typically, the Texas Trust Code does not allow the outright termination of a trust without petitioning a court of proper jurisdiction for approval. But its provisions do allow for combining two or more separate trusts into a single trust without a judicial proceeding. This is only permissible where the combination would not impair the rights of any beneficiary or prevent the trustee from carrying out the purposes of either trust. Again, this is a great tool for consolidating trusts established under a deceased person’s will.

C. “Decanting”

Another alternative to judicial termination of a trust, “decanting,” is the distribution of trust assets from one trust to a new trust that may have slightly different terms. The helpfulness of this provision of the Texas Trust Code largely depends on how much discretion the original trust grants the trustee. An attorney will need to carefully evaluate the level of variance the new trust may have under the circumstances.

D. Judicial Termination

A trustee or beneficiary may petition a court of proper jurisdiction to order the termination or modification of a trust. However, the grounds to do so are limited and specifically outlined in the Texas Trust Code. Petitioners should not expect a quick and easy process; terminating a trust in a court of law requires careful preparation, evidence, and a willing judge.

E. Termination by Agreement

Texas case law has recognized that in certain instances the settlor, trustee, and beneficiaries of an irrevocable trust may collectively agree to terminate the trust. This is a great tool if all parties are agreeable. But it does have its drawbacks. If the settlor is dead, then no agreement may be reached. Furthermore, an incapacitated beneficiary may not enter the agreement, further halting any opportunity to proceed under this method.

Trusts are excellent vehicles to achieve any number of tax, asset protection, or family dynamics-related objectives. At some point, these irrevocable trusts may become burdensome and unnecessary. An attorney may use the methods mentioned above to terminate or modify those pesky trusts.


Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner primarily has focused his legal efforts in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer graduated from Baylor University School of Law.  

The Effects of Divorce on Wills and Estate Plans in Texas

Here is a guide to the legal effects of divorce on Wills, Trust instruments, and financial accounts in Texas.

Wills and Divorce in Texas.  When a person’s marriage is dissolved by divorce, the former spouse cannot receive any payments, benefits or inherit property from that person’s will unless it expressly states otherwise. Not only is the former spouse not allowed to take any benefits or serve in a fiduciary role with regard to the estate, but neither can a relative of the former spouse do so, unless the relative is also a relative of the testator.

Trust Instruments and Divorce in Texas.  A person can create a trust through provisions in a will. However, if that person’s marriage is dissolved by divorce, Texas law will operate as if the former spouse has disclaimed his or her interest in the trust. The divorce cancels the former spouse’s right to receive any property from the trust, to act as trustee, or to be appointed in any other fiduciary capacity. However, this rule applies only to trusts created in a will, and not to trusts created during one’s lifetime.

Divorce on P.O.D. and Multiple-party accounts.  If a deceased individual has established a “pay on death”, multiple-party account, or any other beneficiary designation during a marriage that ends in divorce, the beneficiary designation of the former spouse, as well as of relatives of the former spouse who are not a relative of the decedent, are no longer effective.

Exceptions to the Rule. Some exceptions to the general rules occur under the following circumstances:

  1. The Court’s divorce decree so orders.
  2. Express terms in a trust instrument grant rights regardless of divorce.
  3. An express provision of a pre-nup or post-nup relates to the division of the marriage estate.
  4. The decedent reaffirms the survivorship agreement in writing.
  5. There are express provisions in joint trust documents.
  6. The former spouse is re-designated as the P.O.D. payee or beneficiary after a divorce.

This article brushes the surface of the many estate planning issues that can occur after a divorce in Texas. Be sure to review your estate planning documents yearly and seek the counsel of an attorney when there has been a major life event, such as marriage, birth, death, changes in investment accounts, property changes, or divorce.


Elaine Price practices in the areas of probate, heirship, and guardianship proceedings. Ms. Price is a graduate of the Thurgood Marshall School of Law and holds a Bachelor of Arts in political science from Prarie View A&M. Elaine was formerly with the law office of Rhonda Hunter.

Upjohn Clause: A Trap for the Unwary Trustee

Featured image: Bethany and Preston Kelso. Photo used with subjects’ permission.

Many trust instruments prohibit trustees from relieving themselves of a legal duty under applicable law.  Such language, which is sometimes referred to as an “Upjohn” clause after the case of Upjohn v. U.S.  (30 A.F.T.R. 2d. 72-5918 (W.D. Mich 1972)), is most often, intended to prohibit a trustee from using trust assets to pay for anything which he or she is obligated to provide to his or her child as a matter of law and regardless of the trust.

Section 151.001 of the Texas Family Code imposes a legal obligation on parents to support their minor children.  This includes the duty to provide a child with clothing, food, shelter, education, and medical and dental care.

The prohibitive language of an Upjohn clause typically comes into play in one of two scenarios:  Either a grandparent has established a trust for the benefit of a minor grandchild and named the intervening child as trustee, or a spouse has established a trust for the benefit of a minor child and named the other spouse as trustee.  In either case, the trustee is the parent of the beneficiary and owes the beneficiary a legal duty of support because the beneficiary is a minor.  Although there are other circumstances where an Upjohn clause might apply (for example in the context of a marriage or guardianship), corporate and unrelated trustees generally do not need to concern themselves with this particular legal landmine.

The legal obligations prohibition is primarily meant to prevent inclusion of the entire trust corpus in a trustee’s estate under Treas. Reg. § 20.2041-1(c)(1), which treats the power to relieve a support obligation as a general power of appointment.  Importantly, the trustee does not have to actually discharge an obligation.  The mere power to do so is enough to cause inclusion.  This is why some affirmative mechanism is needed to deny the trustee such power in the first place.

Legal support prohibitions are often contained in the boilerplate of a trust instrument which individual trustees are unlikely to bother reading and less likely to understand.  Litigators who specialize in trust administration issues know to look for these clauses and point out violations.  If a trustee makes even a small distribution in violation of an Upjohn clause, he or she has violated his or her fiduciary duty and may be subject to severe reprimand.  This underscores the point that trustees, and in particular individual trustees, should maintain a close relationship with their attorneys and other professional advisors.

Although the distributions prohibited by an Upjohn clause are narrow in scope, there is very little legal precedent for determining exactly what is prohibited and what is not, so the best course of action is to proceed conservatively and with an abundance of caution.

In the absence of legal precedent to the contrary, more conservative guidelines are advisable.  Thus, where an Upjohn clause applies, the following expenditures are best avoided:

  • Rent or any similar payments
  • Home improvements or decor
  • Homeowners or renters’ insurance
  • Basic utilities for the home
  • Property taxes
  • Clothing
  • Health insurance
  • Non-elective healthcare
  • General dentistry
  • Dentures
  • Optometry
  • Prescription glasses
  • Food

On the other hand, there are a number of expenses which do not fall within support obligation, so trust assets may be properly expendable on the following:

  • Cell phones
  • Pets
  • TV, cable, or satellite service
  • Internet service
  • Personal accessories
  • Automobiles
  • Auto insurance
  • Private school education
  • Extracurricular activities
  • Trips and vacations
  • Elective health care
  • Orthodontics

If you would like to discuss the particular language in your trust instrument, or the circumstances in which it operates, please contact one of our trust attorneys for guidance.


Christian Kelso | Farrow-GIllespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a Senior Associate at Farrow-Gillespie Heath Witter, LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law.  He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Estate Planning & Elderlaw | Dallas, TX

Capacity to sign

Estate Planning | Farrow-Gillespie & Heath | Dallas, TXDifferent legal actions require different levels of mental capacity to be valid.  For example, the level of mental capacity required to sign a will, referred to as “testamentary capacity,” is lower than the level of capacity required to sign a contract, called “contractual capacity.” The various standards are discussed below.

Capacity to Sign a Will – Testamentary Capacity

To have testamentary capacity, the will signer must satisfy five requirements.  First, the signer must understand the business in which they are engaged.  Second, the signer must understand the effects of making a will.  Third, the signer must understand the general nature and extent of their own property.  Fourth, the signer must know to whom their property should pass or is likely to pass.  And fifth, the signer must be able to collect all of this information in their mind at once and understand the how it all connects.  They also must not suffer from an “insane delusion” that affects the will, nor be under undue influence from an outside party.

A person signing a will may do so during a lucid interval (sometimes also known as a “moment of clarity”), which is a time of mental capacity that is both preceded and followed by periods of mental incapacity.  As long as the signing occurs during this lucid interval, the person has capacity to execute the document at issue.

Testamentary capacity must be proven only if the will is challenged by someone during the probate process.  The party seeking to uphold the will (the will proponent) is the party who must prove that the testator did, in fact, have capacity at the time of the will signing.  To guard against claims to the contrary, the estate planning attorney should be certain that the testator has capacity at signing, and should not allow someone with questionable capacity to execute a will.

Capacity for Other Legal Arrangements

In contrast to testamentary capacity, the standard for legally signing other documents is generally higher.

Contractual Capacity

Contractual capacity is the mental capacity required to validly execute a contract.  Contractual capacity requires that the contracting person appreciates the effects of the act of signing the contract, and understands the nature and consequences of signing the contract as well as the business that they are conducting.

Power of Attorney

Although not entirely clear under Texas law, proper execution of a power of attorney probably requires contractual capacity.  The reason is that the POA is valid during the signer’s lifetime and can have a profound effect on business and financial transactions.

Donative Capacity

Donative capacity, or the capacity to make a gift, is an elusive concept in Texas, but other states require something that appears to be higher than contractual capacity. Common requirements are that the donor of the gift must understand the nature and purpose of the gift, the kind and amount of property given, who is a reasonable recipient of the gift, and the effect the gift will have on the donor.  Some states go so far as to require that the donor understand that the gift is irrevocable and that it will reduce the donor’s own assets.

Health Care Decisions

The capacity required to make health care decisions is more than mere mental capacity.  Patients must give “informed consent” to all health care procedures, which requires that the patient be competent and that the consent be given voluntarily.  The consent is informed when the health care provider gives the patient the information the patient needs to make the right choice.

The Effect of a Lack of Capacity

If a person does not meet the requisite mental capacity requirements when he or she enters into a legal arrangement, the arrangement and its supporting documents are generally void and unenforceable.  Third parties can challenge these documents if they believed the person lacked capacity when the documents were signed.  For a will, that means bringing a contest during the probate process.

Read More:
  • Michael H. Wald, The Ethics of Capacity, 77 Tex. B.J. 975 (2014).
  • Rudersdorf v. Bowers, 112 SW2d 784, 789 (Tex. Civ. App.—Galveston, 1938).
  • Tieken v. Midwestern State Univ., 912 SW2d 878, 882 (Tex. App.—Fort Worth, 1995).

Catherine Parsley was an intern at Farrow-Gillespie Heath Witter, LLP in 2017.  Ms. Parsley is a law student at SMU Dedman School of Law in Dallas, Texas, where she is a staff editor of the SMU Law Review.  Catherine served as a judicial extern for Chief Justice Nathan L. Hecht, of the Supreme Court of Texas.  She holds a B.S. in communications studies, cum laude, from the University of Texas at Austin.


Christian Kelso | Farrow-GIllespie & Heath LLP | Dallas, TXChristian Kelso is a Senior Associate at Farrow-Gillespie Heath Witter, LLP.  He practices in the areas of estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law.  He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law. Mr. Kelso has written and presented on numerous topics, including a recent webinar sponsored by the State Bar of Texas, entitled “Caregiver Do’s and Don’ts.”

FBAR deadline is April 18

The annual due date for filing Reports of Foreign Bank and Financial Accounts (FBAR) for foreign financial accounts has been changed from June 30 of each year to April 15.  This date change was mandated by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Public Law 114-41 (the Act).  Section 2006(b)(11) of the Act changes the FBAR due date to April 15 to coincide with the federal income tax filing season.

All United States citizens and permanent residents who own or have signing authority over financial accounts valued in the aggregate at more than $10,000 and located outside the United States must file the annual FBAR report.  Penalties for failing to do so include criminal prosecution and forfeiture of up to 100% of the funds in the foreign account(s).

Extensions

The maximum extension for filing the FBAR is six months, to October 15.  Filers who fail to meet the FBAR annual due date of April 15 will receive an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.

Deadline for 2017

Because of the Washington D.C. holiday that falls in 2017 on April 15, the due date for FBAR filings for foreign financial accounts maintained during calendar year 2016 is April 18, 2017, corresponding to the federal income tax deadline.

For more information, contact Liza Farrow-Gillespie or Christian Kelso.

Digital asset planning

As technology advances over time, the average person owns more and more digital assets. The definition of digital assets is very broad and includes intangible assets ranging from online accounts, such as bank accounts, email accounts, and social media, to digital files stored on a computer or in the cloud.  Traditional estate planning tools have been useful in dealing with comparable non-digital assets, such as by allowing a person’s fiduciary to deal with a bank in person. However, the efficacy of traditional estate planning tools on digital assets is still unclear.

Digital Assets Under Federal Law

While most issues of property disposition are handled by state laws, digital assets are usually controlled at the federal level because of their interstate nature. Original guidance was offered by the Electronic Communications Privacy Act of 1986 (ECPA)’s Stored Communications Act (SCA).  The SCA allows digital asset providers to deny access to anyone, but includes a now-abused “lawful consent” exception.  The exception is not applied uniformly between states and is therefore unclear and unhelpful.

Digital Assets Under Texas State Law

More recently, twenty-three states have passed the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) in some form, which provides specific guidance on how to distribute digital assets upon death. RUFADAA allows a person’s fiduciary, such as an agent or executor, access to online accounts if the person explicitly grants the power in an estate planning document or through a service provider’s own procedures.  RUFADAA also allows the fiduciary to determine how to distribute and manage the assets after the person’s death.  RUFADAA was filed in the Texas Legislature on February 21, 2017 for consideration during the 85th Regular Session.

In states that have not passed RUFADAA, planning for the disposition of digital assets remains unclear. Most digital assets will be governed by the user’s licensing agreements, which vary over time and between assets.  More certainty will likely arise as these assets become more prevalent.

Estate Planning for Digital Assets

Whether or not the Texas legislature adopts RUFADAA, special considerations for digital assets should be included in every estate plan. The attorneys at Farrow-Gillespie & Heath, LLP understand the issues digital assets present and are prepared to help clients address them in a way that is appropriate for each client’s particular situation.

Read More

About the Author

Catherine Parsley is currently (March 2017) an intern at Farrow-Gillespie Heath Witter, LLP.  Ms. Parsley is a law student at SMU Dedman School of Law in Dallas, Texas, where she is a staff editor of the SMU Law Review.  Catherine served as a judicial extern for Chief Justice Nathan L. Hecht, of the Supreme Court of Texas.  She holds a B.S. in communications studies, cum laude, from the University of Texas at Austin.

It’s time to make your 663(b) trust and estate distributions!

Christian Kelso | Farrow-GIllespie & Heath LLP | Dallas, TX

Contact Christian Kelso to guide you through the estate planning process.

Trusts and estates often pay more tax than individuals in like circumstances.  This is not because they are taxed at higher rates, but rather because the same rates applicable to individuals are “compressed,” meaning that each marginal rate increase happens at a lower level of income than it does for individuals.  For example, the highest rate of income tax for both trusts and individuals for 2016 was 39.6%, but whereas this rate only applies to income over $415,050 for single individual filers, for trusts and estates, this rate applies to all income over $12,400.  Other tax burdens, such as the 3.8% Net Investment Income Tax (a/k/a the “Obamacare Tax”) and higher rates of capital gains tax follow suit along similar lines.  Obviously, these add up to a significant potential tax burden.

Fortunately, there is a way to mitigate this tax burden.  Trusts and estates may take a deduction for “distributable net income,” which is generally the amount of income that is distributed from the trust to a beneficiary.  When this happens, the income is effectively shifted from the trust to the beneficiary, who simply adds it to their personal return and pays at whatever rate is applicable to them (including the distributed trust income, of course).

Since large amounts of unnecessary tax can be avoided by shifting income to beneficiaries in this manner, it is common practice for trustees to make distributions for this purpose, assuming, of course, that such distributions are permissible and proper under the terms of the trust.  But there is a problem:  How does the trustee know how much income to distribute from a given trust before the close of a given tax year?  Unfortunately, it is impossible, to know exactly how much income a trust has until after the tax year has closed, at which point, it’s too late to distribute all the income.

Enter IRC §663(b).  Under this special provision, a trust or estate may elect to treat any distribution made within the first 65 days of a given tax year as having been made on December 31 of the previous year.  In other words, the trustee gets 65 days after the actual close of the year to calculate how much income should have been distributed and then actually make that distribution.  The trustee then makes an election on the trust or estate’s income tax return (Form 1041) and voila, the problem is solved!

Although §663(b) distributions may provide a significant benefit, the can also represent a significant danger to trustees.  On the one hand, any distribution from a trust should only be made if and to the extent it is proper under the terms of the trust.  Even if such a distribution is permissible, it may not be in the best interests of a given beneficiary, as taxes are only one of many considerations.  On the other hand, a §663(b) distributions can save a significant amount of tax, so failing to make such a distribution, if permitted, could subject a trustee to liability for waste.

Making the right decision requires careful analysis.  The fiduciary attorneys at Farrow-Gillespie Heath Witter, LLP are well-versed with the applicable law and have the practical experience to understand the nuanced process that is involved with make the right decision.  If we can help you with this, please don’t hesitate to call.

The trust and estate planning attorneys at Farrow-Gillespie Heath Witter LLP, located in downtown Dallas, serve all of your trust and estate planning needs, including:

  • Estate planning for small estates
  • Estate planning for large, taxable estates
  • Trust review and modification
  • Trust and estate administration
  • Trust litigation
  • Will contests
  • Probate
  • Heirship proceedings
  • Guardianships

Family Governance Arrangements: Putting the SUCCESS into succession planning

Christian Kelso | Farrow-Gillespie & Heath LLPBy Christian Kelso
June 4, 2016

It is a little known fact, but the über-rich have a trick for both keeping the peace in their families and preserving their vast fortunes. They participate in something called family governance planning.  Most of us are unfamiliar with this concept, but it’s not difficult to grasp on a fundamental level.  Put simply, family governance has two parts:  First, it involves identifying and agreeing on specific goals which a family can actively pursue.  Second, it involves establishing rules by which those goals will be pursued and what each family member will contribute in the furtherance of that pursuit.  In other words, family governance charts a course for the family unit and provides clarity and transparency among and between the individual family members so that they can function more cohesively as a group.

Most families fail to conduct any family governance planning whatsoever. And they often pay for it in the form of costly legal disputes, intra-familial discord and lasting, emotionally-charged feuds.  Family governance seeks to minimize this negativity by addressing some or all of the following:

  1. Expectations regarding wealth;
  2. Caring for elderly family members;
  3. Employment within the family business;
  4. Investment and management of family assets;
  5. Procedures for resolving grievances;
  6. Spousal issues;
  7. Enfranchisement and training of younger generations; and
  8. Charitable giving.

Different families will apply family governance strategies to varying degrees depending on a number of factors, such as size of the family, relative ages of the family members, assets held by the family, status of existing family relationships and quite a few more. Thus, every structure is necessarily bespoke and it is usually quite helpful to have a professional guide who can provide guidance, technical clarity and an unbiased third-party perspective.

At the highest levels, comprehensive family governance planning may include some or all of the following:

  1. Regular family assemblies
  2. Family mission statement;
  3. Family constitution;
  4. Formalized narrative of family history and traditions;
  5. Family counsel tasked with dispute resolution;
  6. Various committees (i.e. Investment, Education, Administrative, Charitable, etc…);
  7. Trustees;

Typically, larger, wealthier families will employ more of these components while families of more modest means will employ less. At a minimum, however, regular (usually annual) family assemblies are necessary to identify the extent to which various components are needed and flesh them out.  These assemblies often take the form of a family vacation or reunion where participants are encouraged to both work and play.  A typical family assembly agenda (which in certain circumstances can even be deductible for income tax purposes) might look like this:

A family assembly will usually begin with an initial session to set the tone for the assembly, as well as the goals and ground rules. Steps should be taken to avoid disillusionment by family members because participation by all relevant players is crucial.  Therefore, the patriarch or other organizer should avoid talking down to the other family members and focus on listening to their thoughts and opinions.  That said, it should be clear from the start that the purpose of a family assembly is not to voice grievances, assign blame or point fingers.  Rather the focus should be on moving forward towards a common goal.  At the end of the day (or weekend or week), the primary goal should be for everyone in the family to “get on the same page” about family business, relationships and expectations.

After setting the initial tone and ground rules, the family may benefit from some exercise designed to promote what the military calls “unit cohesion.” That is, a discussion designed to get the family pumped up about its own history and traditions.  Discussions of family heritage, retelling of family lore and recognition of individual accomplishments (i.e. since the last family assembly), may help motivate the family to proceed with the work ahead.  The family should also acknowledge the extent to which it was able to meet its goals as set out in the previous family assembly.

At this point, the family mission statement should be restated and evaluated. Note that this is done before the new goals are set out because the adoption of new goals will be guided by the family mission statement.  That is, goals that do not fit within the mission statement probably should not be adopted.

Often times, this discussion is best had over dinner with a little (but not too much) drink. It also provides an opportune time to incorporate and educate spouses.  Remember, the directive to have fun at a family assembly is just as important as the conduct of business.

The next step is to report on the status of family affairs and set expectations. This will often be the point at which the patriarch does the most talking.  He or she should describe with appropriate specificity the outlay of the family’s assets and liabilities.  An accurate description of his or her estate plan is also germane to this part of the meeting and should be made in front of all relevant family members with complete transparency.  The implications, tax and otherwise, of any estate planning techniques should also be explained to each expectant beneficiary so that they can have clear expectations of what is to come and avoid being blind-sided by confusing legal jargon and unintended consequences when the time finally comes.

When discussing his estate plan, a patriarch should make sure to declare his intentions regarding how beneficiaries are to enjoy their inheritance and put them on notice of any restrictions on the use of property. Clarity with regard to the enjoyment of property held in trust can go a long way to reduce friction between beneficiaries and trustees.  Thus, the patriarch should state whether he or she intends for future generations to enjoy the estate assets liberally, as a nest egg, or only as a safety cushion.  Some mention should also be made regarding the ability of spouses to benefit from the estate.  Finally, there will almost always be tax-based restrictions placed on assets held in trust.  These along with any others (for example promoting certain behaviors) should be made clear.

This portion may be the most difficult for the patriarch. For starters, discussing wealth remains extremely taboo in our society.  However, in controlled circumstances, these discussions can literally save future generations from ruin, so it may be helpful to view openness as a lesser evil.  One way to mitigate apprehension in this regard is to set clear expectations for family members with regard to keeping family matters confidential.  Also, clear policies for when and how such information may be brought up with younger family members will likewise provide comfort.  In any event, a balance must be drawn between the need to promote family unity and the desire to avoid embarrassment (or worse) if details are made public.

Once family members have been apprised of the family’s overall status, they can go about setting goals for the future. This may be a tricky part of the program, because family members may not understand what options are available as family goals or the extent to which their eventual achievement might be realistic.  But this part can also be the most fun because it affords the individual family members the opportunity to think outside the box and provides them with the opportunity to plan with hope in their hearts about the future.  The nature and extent of the particular goals will vary widely from family to family.  Within a family, the goals will likely change over time as well.  To the extent there is a large family business, a stronger focus on business objectives will be needed.  These might include some discussion of:

  1. Goals relating to growth;
  2. Acquisition or divestiture of assets;
  3. Development of new products or services;
  4. Employee matters (including hiring family members or others);
  5. Tax matters.

Other families, however, might focus more attention on personal goals such as:

  1. Family members’ education (i.e. high school, college and/or professional degrees);
  2. Identifying charitable beneficiaries the family should support;
  3. Family members’ personal goals (i.e. weight loss, writing a book or promotion at work); and
  4. Setting standards for the care of elderly or disabled family members.

Setting goals necessarily requires the family to assess its own definition of success. Some measures of success can be objective.  For example, determining an amount the family intends to give to charity may be straightforward.  On the other hand, success may also manifest itself more as a path than a destination.  That is, the continuance educational goals developing new familial relationships (i.e. through marriage or the birth of children) are more subjective.

Once the goals have been laid out, the family can map out a path to success. Typically, they will do this by first brainstorming ideas for achieving their goals and then by developing (and memorializing) clear steps each will agree to take in furtherance of each goal.

There are a few keys, however, to doing this effectively. First, larger tasks must be broken down into progressively smaller ones until they become realistically achievable for the individuals responsible for their completion.  Thus, the creative gives way to the practical.  Also, it is important that all family members are encouraged to avoid creating work for others.  Some families have rules effectively stating that the person who mentions some new task should be in charge of seeing to it that the task, if adopted, is completed.

Second, it is very important to avoid disenfranchising any family member. The input of all family members, once they meet certain general criteria, should be valued.  Thus, the tasks assigned to younger family members will be very different than those assigned to older family members, but they should not be described in terms that portray relatively less value.  For example, a family may choose to enfranchise children at age 16.  At that age, however, the child’s primary focus should be finishing high school with the best possible grades and beginning the next phase of life (be that military service, technical school, college or something else).  While young family members may work at the family business in the summer, they will not be responsible for the successful deployment of the new marketing push for the coming fall.  Similarly, adult family members with diminished capacity or those who simply are not interested in participating in the family business should be provided with some opportunity to contribute, no matter how trivial that contributions might seem.  This is because the very essence of family is promoted by each individual’s opportunity to contribute and their ability to “own” some task.

Third, it is absolutely critical that deadlines be placed on each step of the plan. Like it or not, it is a reality of human nature that the road to hell is often paved with good intentions.  A family will have done itself no good if it fails to implement the plan, no matter how masterful.  By providing deadlines, individual family members can be motivated to take the necessary steps towards realizing the family’s stated goals.  Of course, the deadlines (like the individual steps themselves) must be realistic.  This may take several attempts to get right—that is, several years’ worth of family assemblies—so families should not allow themselves to be put off by this.  Rather they should adjust their expectations accordingly.  And to the extent possible, individual family members should avoid criticism of others who missed their deadlines.  Giving a family member less responsibility for the coming year because failed to meet deadlines in the past is criticism enough for most.

After setting out the path towards achieving its goals, the family may wish to revisit operational documents and procedures and amend or adjust as needed. Are the nepotism rules for the family business sill relevant and just?  Does the constitution adequately address methods for resolving conflict?  Does the policy for loaning money to family members need adjustment?  Likewise, appointments to the family council and any committees should be made at this time.  Note that this may not be something that all family members at the assembly participate in.  Depending on the particular family’s circumstances, this may be the exclusive purview of the family council.

The final agenda item for most family assemblies is to recognize a job well done by all. It can be hard work to map out the family’s year, so thanks and congratulations all round are in order, particularly if and to the extent that the family has been able to conduct its business peacefully and on schedule.

Obviously, not every family will follow this exact plan, but it should illustrative as to how family governance can be implemented. Some families may wish to adopt a paired down version of this plan while others may wish to add to it.  For example, workshops can be added to help keep up to date with market trends or other matters relevant to the family business, as well as legal, tax, financial, insurance and other things.

Regardless of how the family governance is implemented, it is very important that the family continues to meet periodically. Most families will chose to meet annually, but bi-annual or quarterly meetings are also standard.  Less frequent meetings, however, may not provide the necessary continuity or guidance.  Indeed, a lot can happen in a year!

To the extent that family assemblies are deductible, they can also provide a patriarch or matriarch with an excellent avenue for shifting wealth. In other words, a family assembly is not much different than a corporate retreat, so they provide an opportunity to give family members something nice (a trip) without any estate or gift tax consequence.

Also, the importance of seeking professional assistance cannot be overstated. A third-party facilitator provides numerous benefits.  First, they can make arrangements for the family assemblies by coordinating with family members, booking hotel rooms, securing meeting spaces, preparing agendas and much more.  Next, facilitators provide unbiased perspective to aid in the decision-making process.  To this end, they can provide guidance with developing family goals, as well as breaking tasks down into achievable parts.  Similarly, they can help keep the family on track.  Family assemblies can easily devolve into chaos without someone who is willing and able to provide the requisite guidance.  Furthermore, a facilitator can assume the role of the “bad guy” and help avoid negativity between family members.  Finally, a professional facilitator may be able to provide clarity and answer questions regarding legal and other documents.  Not only will this help promote realistic expectations, but it will also provide the patriarch an opportunity to communicate his or her thoughts and feelings without being the one who is actually talking.  In other words, it affords the opportunity to talk without the appearance of talking down.

Successful families of means use family governance to achieve their goals and preserve wealth. This can be a very involved (and therefore expensive) prospect.  Fortunately, however, the same principles developed by and for the very rich can also be adapted for families of more modest means.  By seeking the guidance of a professional to help develop a family governance plan and facilitating family assemblies, the family can compound the benefit derived.

While the benefits of goal-setting in the family business context may be easier to grasp, an example will illustrate how family governance can provide great benefits in other areas as well:

Assume Family consists of Dr. Patriarch (a successful physician), Mrs. Matriarch (a homemaker), Junior (an MBA working for a large corporation), Daughter (an art history major working as a docent at a local museum) and Baby (a high-school senior trying to decide on the right college). Assume that Family has a net worth of $7mm.  At their annual family assembly in the Texas Hill Country, Junior expresses a desire to strike out on his own doing the same thing he has been doing at his large company.  Similarly, Daughter expresses her desire to write a book about art collections of Upper Bavarian monasteries in the mid-1290’s.  Baby, on the other hand is debating whether or not to attend an expensive private school or a state school.  Finally, Mrs. Matriarch has joined the board of prestigious local charity that raises money for medical research.

At their assembly, the family might determine it will lend Junior the funds he needs to start his business and the specific terms on which that loan will be made. The family might also determine to purchase equity in the new company.

Additionally, the family may agree to support Daughter by encouraging her to meet set deadlines for certain portions of her book. In this manner, they can increase Daughter’s motivation to accomplish her goals.  She is less likely let herself down if doing so would also mean letting her loved ones down.  Finally, the family might agree to hold their next family assembly at a location that is relevant to Daughter’s work.

Next, since all the family members are together, they will all be able to provide guidance to Baby with regard to his college decision. Also, the financial impact of his final decision will be out in the open for everyone to see.  If Baby decides to attend the expensive college, it may be appropriate for him to enter into a loan agreement with Patriarch to cover the additional tuition, particularly if the other two children attended significantly less expensive schools.

Regarding charitable activities, the family can determine an appropriate amount that it will give away in the coming year. They might further agree that Mrs. Matriarch’s charity will be the charitable recipient and that they will purchase a table for all the family members (along with a spouse or date) at the charity’s annual gala.

Family governance provides clarity of purpose, guidance for achieving specified goals and unity among family members. At the end of this day, this translates into increased family happiness.  Of course, both time and money must be invested, but the rewards will generally exceed the costs by a wide margin.  After all, what price can a family put on its own happiness?

Estate Planning & Elderlaw | Dallas, TX

Power of Attorney Restrictions

A person (“agent”) holding a power of attorney for another person (the “principal”) must act with the utmost degree of loyalty to the principal.  The agent must avoid being involved in any transaction which benefits, or even which potentially benefits, the agent.

That rule of law was enforced once again by the Texas courts in Jordan v. Lyles, No. 12-13-0035-CV, 2015 WL 393791 (Tex. App.–Tyler 2015, no pet. h.).

In that case, the agent used her power of attorney to place a significant portion of the principal’s money into pay-on-death accounts naming the agent as the beneficiary.  At the principal’s death, the principal’s other heirs sued the agent for breach of fiduciary duty for moving the money and receiving it at the principal’s death.  A Tyler jury found in favor of the heirs, and held the agent liable for breach of fiduciary duty and tortious interference with inheritance rights. The appellate court affirmed the jury’s verdict.

The moral to agents is this: If you conduct or participate in a transaction for the principal that benefits you personally, obtain bulletproof evidence that the principal instructed you to do so.  If the principal has lost capacity, it is too late; and unless you obtain the advance approval of all beneficiaries under the principal’s will (or all heirs at law if the principal has no will or has a questionable will), you simply may not do anything with the principal’s property during the remainder of the principal’s lifetime that would be to your benefit.

Estate Planning & Elderlaw | Dallas, TX

Basic Estate Planning Documents

We prepare the following basic estate planning documents at an affordable fixed fee:

  1. Last Will and Testament, validly prepared and executed under Texas law
  2. Statutory Durable Power of Attorney
  3. Medical Power of Attorney
  4. HIPAA Authorization
  5. Directive to Physicians (often called a Living Will)
  6. Appointment of Guardian for Minor Children
  7. Designation of Guardian Before Need Arises
  8. Burial Instructions

Even if an estate is not large enough to be subject to the Federal Estate Tax — and most are not — good estate planning enables a person to transfer his or her property at death in the fastest, easiest, least expensive manner possible. Good estate planning also enables a person to take advantage of the powers granted by the state of Texas to make healthcare choices and to plan appropriately for disability, whether temporary or permanent. Your loved ones will be grateful to you for leaving your affairs in order. Completing these estate planning documents can provide peace of mind for you and your family.

The Will

Every adult who has legal capacity has the authority to designate how his or her assets and liabilities will be distributed at the time of death. To protect that right, the state requires that a Will be properly executed to be considered valid. A valid Texas will can name an Independent Executor to serve without bond and with minimal court supervision. Probate is the legal process of proving the Will in court, settling the estate, and distributing the assets. In Texas the cost of probating a Will is very reasonable. Probate can be very expensive, however, if an individual has assets and dies without a valid Will. Executing a valid Texas Will can go a long way toward preserving your assets for the intended beneficiaries.

Statutory Durable Power of Attorney

The Texas Statutory Durable Power of Attorney is a document that allows you to designate someone to manage your financial affairs or transact business on your behalf in the event it should become necessary or convenient. The powers granted in the document can become effective immediately, or can be designated to become effective only if you become incapacitated. In either case, the powers will remain effective even after your incapacity – hence the use of the word “durable.” This document can be very powerful. The state of Texas has provided a statutory format to be used to help improve acceptance of the document by third parties. Without a Statutory Durable Power of Attorney, a Guardianship would likely be required to take over an incapacitated person’s financial affairs. Guardianships require continuing oversight by the Court, are very expensive, and open a person’s private business to public scrutiny. Having a Texas Statutory Durable Power of Attorney is the estate planning equivalent of a “stitch in time.”

Medical Power of Attorney

The Medical Power of Attorney allows you to designate the person who will make your healthcare decisions in the event you are unable to do so – and only in that event. This document is always important to have. It is particularly valuable where someone other than a spouse will be making those decisions, or when members of a family have differing views of what should happen. If you remember the case of Terry Schiavo in Florida, you should be aware that if she had only executed a Medical Power of Attorney – whether in favor of her husband or her parents – those parties would not have spent the 15 years and untold amounts of money they ultimately spent fighting in court over control of her healthcare decisions.

Directive to Physicians

The Directive to Physicians is sometimes called a Living Will. It allows an individual to decide in advance if he or she wishes to have artificial measures used to sustain life when the person is near death. Many people do not wish to be kept alive by means of artificial respirators or feeding tubes if they are not able to sustain life on their own. Without a Directive to Physicians the doctors involved may be required to use all measures available to sustain life. Proper execution of this document can help maintain a person’s dignity and preserve assets for loved ones. Most importantly, the document allows you to exert maximum control over what happens to you in the event you are unable to speak for yourself.

Designation of Guardian Before Need Arises

The Designation of Guardian Before Need Arises is a relatively new statutory document in the state of Texas. It allows you to designate in advance who your guardian will be should you ever need one – for example, in the event of a debilitating stroke, or an injury that results in incapacity (in which state individuals sometimes linger for many years). The document also allows you to disqualify certain individuals from ever becoming your guardian. This document can bring peace of mind to the maker, and can assist the court in making a proper guardianship designation if the need ever arises.

Appointment of Guardian for Minor Children

If you have minor children, and both you and their other parent die or become incapacitated, the children will need to be cared for by someone until they reach the age of majority. The Appointment of Guardian for Minor Children allows you to choose who that person should be – whether it is a family member or a friend. In the event you do not designate someone yourself before the need arises, your family members may dispute the matter; and in that case, a court of law would decide who will raise your children. You can avoid that possibility and maintain control over your children’s future by executing a Guardian appointment.

Burial Instructions

It is possible to designate a particular person to be in charge of decisions affecting burial and funeral arrangements; and once designated, that person can enforce the right to do so. Within the same document, you may specify your burial instructions.

Conclusion

The documents discussed above form the basic estate planning package. If the estate is large enough to be taxable, certain complex estate planning documents and techniques can minimize and in some cases eliminate the tax liability. For most of us, however, the bottom line is this: Good advance planning significantly eases the emotional and financial burden of disability and death on our loved ones.

For more information, or to make an estate planning appointment, please call 214-361-5600.

Farrow-Gillespie Heath Witter LLP | Dallas, TX