Many of our clients innocently create accounts, and even hold real property, in ways that circumvent their Will plan. In the best case, this might mean more taxes or sacrifice non-tax trust protections. In the worst case (and the examples are legion), this results in an ugly family fight, even litigation.

Why so much emphasis on the style of ownership? Simply put, it matters. It defines to whom your asset passes upon your death. If you create a joint-tenancy-with-rights-of-survivorship account (“JTWROS”) or pay-on-death bank account (“POD”) or transfer-on-death brokerage account (“TOD”), you are undertaking to direct that account’s disposition when you die. And this may well be inconsistent with your Will plan. Even beyond those designations that are governed by specific statutes in the Texas Estates Code, some of the mega-financial institutions (Fidelity and Schwab to name a couple) have created their own version of accounts to “avoid probate.” These are often referred to by them as “beneficiary-designated” accounts, and they are touted by the institution as a way to avoid probate and have your heir(s) obtain easy access at your passing.

To be sure, avoiding probate has a superficial allure to it. But recall that Texas probate is one of the most (if not the most) streamlined probate processes in the country. In approximately the same time it takes to secure a death certificate (which is the legal documentation required to access all of the above type accounts), one can secure “letters testamentary” as executor under Texas law (at least in most counties), allowing that executor to access all probate accounts.

Why then do these institutions tout these types of “non-probate” accounts? Some people suggest they are focused on the retail customer, who does not have trust planning and tax planning objectives. Others, more jaded perhaps, sense that the institution is looking out as much for their own protection, not interested in getting ensnared in a potential Will contest that could conceivably affect probate accounts.

Whatever their motivation, we emphatically urge our clients to default to avoiding these non-probate type accounts, unless we specifically approve them in the overall estate plan. Take John and Mary who are married and have Wills that create trusts for the surviving spouse upon the first death (in part for tax planning, and in part to protect from a second marriage). If John has a beneficiary-designated account that passes outright to Mary upon his death, he has sacrificed the trust protections as to that account. On the other hand, if his Will passes his estate in full to Mary, such an account would not be detrimental.

Consider the children of a widowed client of ours who are to share the estate equally under her Will. One of the children, let’s call him Don, is Mom’s agent under her power of attorney and is the point person for helping with her financial affairs in her declining years. Mom set up a joint account with Don years ago, so he could sign checks and handle funds. The account was styled “JTWROS.” Don now sells Mom’s home and places the sale proceeds in the JTWROS account. Mom later dies, and the proceeds of the home appear to pass to Don on the face of the account, but has he perhaps breached his fiduciary duty by redirecting those from her Will to himself? Possibilities here: Don shares these funds equally with his siblings (has he made a taxable gift by doing so?). Or, perhaps a family feud ensues. Worst case of all, the parties polarize and a lawsuit absorbs a good portion of these funds.

What about the new Texas law that allows a “transfer-on-death-deed”? Similar concerns arise, in that the superficial allure is to streamline matters upon death of the property owner, when indeed this could well complicate matters instead. As its name suggests, the transfer-on-death deed is a deed under which “Mom” retains her ownership in the real estate in question for life, but [revocably] directs its disposition in the deed as of her death. If Mom names two or more beneficiaries on such deed and one predeceases her, that share passes through Mom’s Will. Say she names Peter and James, both of whom have children, but Peter predeceases her. Peter’s share passes through her Will, which probably provides 50% to James and 50% to Peter’s children. Now, this means James is getting his half from the deed and another 50% of the remaining half via Mom’s Will; Peter’s children suffer by 25%, unintentionally. Moreover, these “TODD” deeds, while conceived to simplify matters at death, might stall a sale (and even require a court proceeding) if a title company is concerned about potential creditor issues until the “claims” period expires; this is not an issue when the real estate passes through the probate process.

All in all, strategies that appear to be a “magic pill” need to be vetted with your estate planning attorney, given the particularities of your estate plan, and we at Farner & Perrin are here to do just that. Let us know when questions arise around these types of issues and we will help you navigate them.

We live in a world where most of us have a growing online presence. Yet too few have stopped to ponder what will happen to our logins when we are gone. Our various digital accounts – email, social media, business, financial, photo-sharing, bill pay, loyalty programs, bitcoin, etc. – have collectively morphed into a new form of personal property. Not quite tangible; not quite intangible; but valuable, nonetheless. A recent survey concluded that the average person living in the United States owns approximately $55,000 worth of “digital assets,” not to mention the emotional value.

With so much value attributed to our digital assets, it is prudent to consider the status of these assets upon incapacity or death. Will your agent under your power of attorney have access to your online financial accounts? Will your loved ones be able to access all of your family photos after your death? How can you assure access of the ones you trust while protecting your identity? It is important to give some thought to the eventual transfer of these assets and even their incorporation into a “digital estate plan.”

Doing so, however, may be tedious enough that you vow to go off “the grid” for good. That is because, unfortunately, no two digital assets are created or governed the same. You may own some of your digital assets, while others only grant you a license and are subject to user agreements and terms of service. Therefore, the permitted transfer of each asset and the way by which you grant a third party access (during life or at death) can vary widely. And while Federal law has attempted to regulate some of our digital communications and computer fraud and abuse, technology is evolving faster than Congress can react to the corresponding issues created. Similarly, the Texas Legislature has considered crafting legislation addressing fiduciary access to digital assets, but to date has failed to pass legislation to govern this arena. In fact, demonstrating the magnitude of the problem, there is not yet even a universally-accepted definition of “digital assets.”

So, what can you do to protect your digital assets, ensuring access by those intended and securing the transfer of their value at death? As part of any estate planning update, you should categorize all of your digital accounts and include passwords, keeping this list in a safe place (perhaps with your Will or incapacity documents) known only to your fiduciaries so that they have access in the event of your incapacity or death. This list should specifically include any bill-pay schedules, so that your fiduciaries can ensure the mortgage gets paid and the electricity stays on. If you have an account of particular value or significance, you should review the licensing agreement or user agreement, which usually specifies precisely how to grant a third party access or to transfer any value in the account. You may also wish to contact the provider directly for any guidance they can provide. Fiduciaries who take on the role of managing any digital assets should also double check the respective governing agreements, since Federal law criminalizes unauthorized access to certain electronic communications. Whenever possible, and especially with digital photos, videos, legal documents and important correspondence, you should back up digital assets to tangible media. Finally, a quick Google search for digital afterlife companies will give you a list of businesses that allow you to catalog accounts, store passwords and designate your wishes as to your digital assets. Ironically, that creates yet another digital asset to consider.

Though not an attempt to cover every type of digital asset, here are a few commonly-used digital account types with some preliminary guidance on how to designate access upon your incapacity or death:

• Google has an “Inactive Account Manager” option. This allows you to designate who should have access and what should be done with your Google accounts. If the deceased account holder has failed to provide instructions as to his or her account, Google also has a process to work with immediate family members and estate representatives to close or access the account.
• Facebook allows you to appoint a custodian for your account using its “Legacy Contact Feature.” Your designated custodian will have only limited access to your page in an effort to preserve your privacy. Facebook also has an alternate option that allows you to direct that your page be immediately deleted upon your death.
• LinkedIn has a process by which your family member or loved one completes an online form after your death. This person is asked to provide your name, profile URL, email address and date of death, the last company your worked for and a link to your obituary. LinkedIn will then reach out to the person who has completed the form to discuss the removal of your profile.
• Twitter freezes your account immediately upon notification of your death. Twitter will work with the person authorized to act on behalf of the estate or a verified immediate family member to have the account deactivated. Account access is barred to anyone regardless of his or her relationship with the deceased account holder.

As for your computer files, you should provide the locations and passwords to your fiduciary, along with the existence and location of any backups.

Ownership of domain names can be paid for on a long-term basis. This should be considered where a website should continue after the death of its owner. Your fiduciary should be aware of and have access to your hosting agreement so that he or she can renew the agreement when necessary.

Whether to your delight or dismay, it is becoming harder to avoid the digital aspects of life. The best you can do is be conscious of the issues and prepare for worst. And by all means, back up regularly.

Below are some legal issues that we wish to highlight for you. Let us know if you have questions, or need further detail, about any of these nuggets.

1.   Income tax basis reporting:  All estates required to file Federal estate tax returns (as opposed to an estate filing a return merely to make a “portability” election) must now also file a separate basis reporting form with the IRS (Form 8971). This new form is due thirty days after the estate tax return. Unfortunately, these new requirements will make estate administration more onerous for Executors and therefore more expensive to complete. The Treasury Regulations also require that every Executor provide to all estate beneficiaries a statement with detailed information concerning the basis of the assets they have inherited. The due date for the initial Form 8971 has been extended several times, as the IRS has struggled to promulgate the form and provide related guidance. The first Forms 8971 are now due to be filed on June 30, 2016.  In many cases, an estate tax return extension will now be recommended, since it will be optimal to fund trusts established under the Will before the Form 8971 is filed. Any assets omitted from the Form 8971 will be received with a zero basis.

2.   Divorce protection:  Not all states afford trust beneficiaries and trust assets with the same levels of protection. While the protection of trust assets for beneficiaries going through a divorce in Texas is strong, a few states are beginning to apply equitable principles, offsetting what a divorced beneficiary might otherwise receive in the divorce by amounts held in the trust. If not to be near you, this is yet another reason for your children to stay in Texas.

3.   Life insurance health check:  With recent market volatility, and with interest rates having remained low for such an extended period of time, now is a good time to request an “in-force illustration” for your life insurance policy and review it with your insurance professional. The in-force illustration is designed to help evaluate whether your policy is performing as projected, and if not, your insurance professional should offer advice on how best to address the situation.

4.   Scrutiny of powers of attorney:  Much to our amazement, it seems that with increasing frequency financial institutions find reasons not to accept powers of attorney. One suggestion is to ask your financial institutions to review your current financial power of attorney, and approve your agent’s use of it should it be presented in the future. Securing this approval in writing is recommended. Another protection is to consider executing the institutional power of attorney offered by your particular financial institution(s), though we suggest you have it reviewed by us in advance.

5.   International reporting:  Estate planning and probate matters with an international overlay present special complications and need extra attention. Federal tax law is ever-changing with regard to the reporting of foreign assets and transactions with foreign individuals, and requires diligent attention to ongoing developments. Some of the more significant of these types of reporting requirements include the following:

     a. Reporting and Withholding on Distributions from U.S. Trusts to Non-resident Alien Beneficiaries (Form 1042-S)
     b. Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (Form 3520)
     c. Annual Information Return of Foreign Trust with a U.S. Owner (Form 3520-A)
     d. FinCen Report 114 (now supersedes Report of Foreign Bank and Financial Accounts (FBAR))
     e. Foreign Account Tax Compliance Act (FATCA) and Statement of Specified Foreign Financial Assets (Form 8938)

Equally complex are the issues associated with estates owning foreign assets, or with estates having foreign beneficiaries. While much can be done in the planning stages to minimize the tax burdens and complication of these matters, issues which must be addressed include: the coordination of US and foreign Wills, or the probate of a US Will in a foreign jurisdiction; tax payments and assuring appropriate foreign tax credits, after consideration of relevant treaties; administration of trusts across jurisdictions including relevant taxation; and application of any forced heirship or inheritance rights imposed by the foreign country. Clearly these issues cannot be adequately addressed in a brief legal “nugget,” but if any of these international overlays present themselves in your situation, you should seek further tax and legal advice, and Farner & Perrin, LLP, can assist or direct you as applicable.

6.   Pending estate tax legislation:  House Democrats introduced legislation last week to restore the Federal estate and gift tax rate and exemption levels to the same amounts as in 2009. The proposed legislation would return the estate tax exemption to $3.5 million per taxpayer and increase the maximum tax rate to 45 percent. It would reinstate the $1 million lifetime gift exemption and retain the annual $14,000 gift tax exclusion and unlimited spousal portability. While this bill is not expected to be passed by Congress this year, it is a good indication of where Congressional Democrats stand on these estate and gift tax issues. Stay tuned, we hear there is an election this November….

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