Estate Planning

The need for “estate planning” is often dismissed by individuals as being a luxury which can only be utilized by the wealthy.  However, anyone who owns any property has need for at least some knowledge of estate planning in order to determine who will receive his or her property at the time of death. 

The term “estate planning” is not restricted to planning or drafting of wills for individuals who will have a federal estate tax consequence at death.  “Estate planning”, when used in its broadest sense, is necessary for the husband and wife who want to leave as much as they can to their surviving spouse for that surviving spouse’s economic well-being and protection.  It is also necessary for the young husband and wife who have several children, a house with a large mortgage, a small savings, and life insurance. 

Estate planning is also necessary for the single individual with no children who desires to distribute his or her property in a manner different from the statutory course.  Do not let the term “estate planning” fool you.  It applies to each of us in some form or fashion.  

There are two fundamental objectives which can lead to successful estate planning.  The individual interested in estate planning should provide his or her advisor with all pertinent family, business, and financial information so that the advisor can grasp an accurate picture of the circumstances relating to the individual.  Second, the individual should generally understand the nature of the estate plan and how it will work.  If these two objectives can be accomplished, then a workable estate plan can result. 

Probate vs. Non-Probate Assets

One of the key elements in gathering information by the advisor is to classify the property of the client as either probate or non-probate assets.  Non-probate assets are generally those assets which pass pursuant to the terms of a contract or an appropriately executed beneficiary designation form.  The best way to define non-probate assets is to list specific examples.  Life insurance policies, tax deferred annuities, individual retirement accounts, profit sharing plans, defined benefit plans, thrift plans, ESOP plans, governmental retirement plans, and U.S. Treasury obligations payable on death to another individual are specific examples of non-probate assets.  Non-probate assets can also be defined as assets which “do not pass” under the terms of a will or under the laws of intestacy.  Probate assets are defined as assets which can pass under the terms of a will or which pass by the laws of intestacy.  Probate assets will generally include real estate, bank accounts, certificates of deposit, stocks, bonds, mutual funds, cars, personal property, and generally any other property which an individual has under his control but which are not payable to a beneficiary pursuant to an agreement or a contract. 

It is important to make the distinction between probate and non-probate assets because the client should know how those assets would be disposed of at the time of death and the rules governing the disposition of those assets.  In the course of this summary, reference will be made to probate and non-probate property. 

Community Property vs. Separate Property

 A classification of property which should be made early on is the distinction between separate property and community property.  Louisiana law imposes the “legal regime of the community of acquets and gains,” in the absence of an agreement or contract to the contrary between a husband and wife.  Each spouse owns an undivided one-half (1/2) interest in the community property.  The term “community property” includes property acquired during the existence of the marriage through the effort, skill, or industry of either spouse; property acquired with community things or with community and separate things, unless classified as separate property; property donated to the spouses jointly; natural and civil fruits of community property; damages awarded for loss or injury to a thing belonging to the community property; and all other property not classified by law as separate property.  There is a presumption in the law that property in the possession of a spouse during the existence of a marriage is presumed to be community, but either spouse may prove that this property is separate. 

The separate property of a spouse is exclusive.  Separate property includes property acquired by a spouse prior to the establishment of a community property regime (i.e., prior to marriage); property acquired by a spouse with separate things or with separate and community things when the value of the community things is inconsequential in comparison with the value of the separate things used; property acquired by a spouse by inheritance or donation to him individually; damages awarded to a spouse in an action for breach of contract against the other spouse or for the loss sustained as a result of fraud or bad faith in the management of community property by the spouse; damages or other indemnity awarded to a spouse in connection with the management of separate property; and things acquired by a spouse as a result of voluntary partition of the community during the existence of a community property regime.  Also, damages due to personal injuries sustained during the existence of the community by a spouse are separate property.  Nevertheless, the portion of the damages attributable to expenses incurred by the community as a result of the injury, or in compensation of the loss of community earnings, is community property. The following might be helpful.  Let us assume that both spouses are employed, and each brings home a paycheck.  Both paychecks are deemed to be community property.  Let us assume that the parents of one of the spouses makes a donation of $10,000.00 each year solely to that spouse.  The $10,000.00 is the separate property of that spouse who received it.  However, the earnings on this gift are community property. 

Matrimonial Agreements and Declarations of Fruits of Separate Property

Prior to entering into marriage or within one year of moving to Louisiana from another state, the husband and wife may execute what is known as a matrimonial agreement or prenuptial agreement to avoid the application of Louisiana’s community property laws.  Even after marriage or after the one year period above, the husband and wife can seek to enter into a matrimonial agreement with court approval.

If either spouse has separate property, the fruits and revenues from that separate property are community property.  A spouse having separate property may execute what is known as a Declaration of Reservation of Separate Fruits and record this declaration in the conveyance records of the parish of domicile and in the parish where any immovable property is located in order to maintain the fruits and revenues from the separate property as separate property also.  Notice must be given to the other spouse. 

Laws of Intestacy- Lousiana

The laws of the State of Louisiana provide for the distribution of the property of an individual if he or she dies without a will.  Let us assume that there is a husband and wife and that they have three children.  Let us further assume that the husband dies owning both community property and separate property.  If the husband dies intestate (without a will), then the separate property of the husband is inherited entirely by the three children in full and complete ownership.  The husband’s one-half (1/2) of the community property is also inherited by the three children subject to the right of usufruct in favor of the surviving wife for her lifetime or until remarriage.  The surviving wife, of course, already owns an undivided one-half (1/2) interest in the community property.  The right of usufruct means that the surviving spouse has the right to the fruits and revenues and the use of the property subject to the usufruct.  The right of usufruct over real estate entitles the surviving spouse (usufructuary) to the right to live on the property or to rent the property and collect rents.  The usufruct over stocks and bonds entitles the usufructuary to the dividends and interest therefrom, but would not entitle the usufructuary to sell the property subject to the usufruct.  The right of usufruct over cash entitles the usufructuary to spend the cash.  In this context, the term “cash” includes such items as savings accounts, checking accounts, certificates of deposit, or money market funds. 

Let us assume that there is a husband and wife and no children.  Let us assume that the husband dies intestate and owns both community and separate property.  In this instance, the community property of the deceased husband is inherited by the surviving spouse.  The separate property of the deceased husband is inherited by the brothers and sisters of the deceased husband subject to the usufruct of the deceased husband’s parents, if living.  If any of the deceased husband’s brothers or sisters are deceased, then the nieces and nephews take a share by way of representation.  If the deceased husband has neither descendants, nor parents, nor brothers, sisters, or descendants from them, then his spouse, not judicially separated, takes his separate property. 

Finally, if we assume an unmarried individual who has never had any children, all of his property will be separate property (because he is not married) and will pass to his brothers and sisters subject to his parents’ usufruct in the same manner as the separate property of the husband in the above example.  If the unmarried individual does not have brothers, sisters, descendants of brothers or sisters, or parents, then his property would pass to other ascendants (i.e. grandparents) or, if none, to his other collateral heirs nearest in degree. 

The Louisiana Civil Code provides for how a person’s property is distributed under other circumstances when the deceased dies without a will.  Keep in mind that dying intestate, or without a will, is not the same as forced heirship.

Forced Heirship

The State of Louisiana is the only state in the United States which has the concept of forced heirship.  Under the concept of forced heirship, if an individual makes a will and fails to leave his forced heirs a certain portion of his property, then those forced heirs can claim a portion of the deceased parent’s property.  The current law provides that the class of forced heirs is limited to children who are twenty-three years of age or younger at the time of the decedent’s death or descendants of any age who, because of mental incapacity or physical infirmity, are permanently incapable of taking care of their persons or administering their estates at the time of death of the decedent.  Under this law, if a deceased parent has one forced heir, the forced heir can claim one-fourth (1/4) of the parent’s property.  If the deceased parent has two or more forced heirs, then those forced heirs are entitled to claim one-half (1/2) of the parent’s property.  Keep in mind that even though the forced heirs have the right to claim a portion of the deceased parent’s property, the deceased parent can still provide a usufruct for life and beyond remarriage in favor of the deceased’s surviving spouse. 

It is not necessarily just children who are forced heirs.  For example, if a child predeceases his father but leaves his own children, i.e., grandchildren, then those grandchildren are forced heirs to their grandfather’s estate provided that the grandfather’s child would have been twenty-three years of age or younger at the time of the grandfather’s death.  In other words, the grandchildren are entitled to step into the shoes of their deceased parent to inherit whatever he would have been entitled to but no more than that.  If the deceased parent would not have been a forced heir if he had been alive, then the grandchildren will not be forced heirs.  However, a grandchild who is permanently incapable of taking care of his person or administering his estate at the time of the grandfather’s death may “represent” his predeceased parent regardless of what that parent’s age would have been.  Also, children who are adopted have the same rights as forced heirs and intestate heirs. 

The forced heirship law not only applies to property which the deceased owns at the time of his death, but also applies to previous donations made within three years of death.  At the time of the deceased’s death, an aggregate is formed of all the property belonging to the deceased at the time of his death, plus there is fictitiously added to this amount the property disposed of by donation inter vivos made within three years of death, according to its value at the time of the donation.  From this amount is deducted the debts of the estate.  The percentages to which the forced heirs are entitled are then applied to this aggregate mass of property.  If the amount of property that is actually in the estate is less than the proportion to which the descendants are entitled, then those prior donations by the deceased can be reduced. 

Certain property is not subject to the claims of forced heirs.  This property includes amounts in individual retirement accounts, profit sharing plans, thrift plans, governmental retirement plans, and other such accounts; insurance proceeds payable on the deceased’s life and premiums paid by the deceased for such policy; U.S. Savings Bonds and other U.S. Treasury obligations payable to a beneficiary; presumably out of state real estate; donations made to a spouse of a prior marriage and donations made to certain charitable organizations more than three years prior to the deceased’s death.  Ordinarily, individuals think of tax deferred annuities in the same light as insurance proceeds.  However, Louisiana jurisprudence has determined that tax deferred annuities, even though payable to a specified beneficiary, are subject to the claims of forced heirs.  

Descendants can be disinherited for certain causes that are defined in the Louisiana Civil Code.  The most recent cause added to the Louisiana Civil Code for disinheritance is the situation in which a child has known how to contact the parent, but has failed without just cause to communicate with the parent for a period of two years after the child has attained the age of majority, except when the child is on active duty in any of the military forces of the United States.

Collation

We have discussed the concept of forced heirship and the fact that donations made during a person’s lifetime are subject to reduction at death if a forced heir’s forced heirship portion is not satisfied.  Parallel to this rule runs the rule of collation.  The right to demand collation is confined to descendants of the first degree who qualify as forced heirs and only applies with respect to gifts made within three years of death, valued as of the date of the gift.  Collation concerns donations made during the lifetime by a parent to a child or children.  Louisiana law presumes that parents desire to treat their children equally.  If a parent has, for example, four children and donates to one of those children $10,000.00 but does not donate a similar amount to the other three, then upon the death of the parent, then if the other three children are forced heirs, they can request collation in order to equalize the distributions to all children.  Collation provides an equalizing effect.  The parent can waive collation by including appropriate language in the act of donation or in an appropriate will.

Wills and Testaments 

An important part of Estate Planning should also include a Power of Attorney.  A Power of Attorney is a powerful legal document that allows you to dictate who will manage your financial, healthcare decisions as well as manage your affairs if you become suddenly incapacitated.  If the Power of Attorney is not prepared prior to your incapacitation then it will be necessary to have a court proceeding and the court will name a curator to manage your affairs. 

Trusts

What is a Trust and Why Do I Need One?

When thinking about financial wellness and how estate planning may provide peace of mind, you may be looking for assurances that your hard-earned assets will be cared for in a thoughtful manner. Common strategies for this generally include creating wills or naming beneficiaries of retirement assets. It is also important to consider when and how to create a trust. Because your life is unique, you may have situations that could require special attention. If you are not ready to relinquish control, but you still want the benefits of a trust, you can appoint yourself as trustee and name a successor trustee for when you are ready.

Setting up a trust can provide peace of mind knowing that the care you have provided the people and possessions you love will continue. Knowing which type of trust is best suited for your needs and how to begin can be daunting, which is why we wanted to share some foundational knowledge to help you in your financial wellness journey.

What is a trust?

A trust is a legal document that governs your wishes for how and when to transfer assets, including sentimental items, to beneficiaries or charities of your choosing.

When to create a trust?

Consider setting up a trust if you want to:

• Ensure that your assets are managed for the benefit of your heirs, according to your wishes
• Preserve your assets while potentially minimizing taxes and probate costs associated with transferring assets through a will
• Establish a tax-advantaged charitable gift
• Provide an orderly way of managing your finances if ill health stops you from doing so

For additional information regarding Trusts click here

Disclosure:
Additional information regarding Estate Planning such as Probate, Federal Gift Tax, Federal Estate Tax, Income Tax Issues relating to Estate Planning is not a specialty of this office.  Any questions regarding these matters should be addressed by an Attorney that specializes in Probate.