New IRS position could lead to gift tax consequences in trust modifications and decantings

Taken to its somewhat illogical conclusion, Chief Counsel Advice 202352018 (issued November 28, 2023, released December 29, 2023) could lead to gift tax consequences for beneficiaries of trusts which are modified or decanted in a way that alters beneficial interests in a trust.  Modification of administrative, nondispositive trust provisions should not be affected.

In CCA 202352018, the IRS took the position that beneficiaries’ consent to a trust modification of a defective grantor trust to give the trustee the discretionary power to reimburse the settlor’s income tax payments constituted “a gift of a portion of their respective interest in income and/or principal” of the trust.  While the beneficiaries consented to the modification in the case to which the CCA applies, the CCA provides that “the result would be the same if the modification was pursuant to a state statute that provides beneficiaries with a right to notice and a right to object to the modification and a beneficiary fails to exercise their right to object.”

This is an IRS position, not a court determination.  Still, it could cause concern in cases where a trust is modified or decanted in a way that diminishes the beneficial interest of a beneficiary of the decanted trust.  If the beneficiary consents or does not object to the modification or decanting, he or she could be deemed to have made a gift of a portion of the income or principal of the trust.

Texas Trust Code Section 112.054 – the judicial modification statute – does not require the beneficiary to consent to a modification, but it does make the beneficiary a necessary party, and the beneficiary is entitled to initiate the modification action. Perhaps having the trustee initiate the proceeding and having the beneficiary file a general denial or other non-consenting response will overcome the implications of CCA 202352018.  But trustees are sometimes reluctant to initiate modification suits.  This might be a good use of a trust protector, who could direct the trustee to seek the modification, taking away the trustee’s discretion and overcoming their reluctance to proceed.

Texas Trust Code Section 112.074 – part of the Texas decanting statute – requires notice to beneficiaries of a decanting.  This might be enough to cause the CCA to apply unless the beneficiary objects to the decanting.

A combination of trusts under Texas Trust Code Section 112.057 may avoid the CCA trap because the combination must not “impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust.” If a beneficiary’s rights may not be impeded, then presumably he or she will not be making a gift of a beneficial interest in the trust. 

Often the modification, decanting or combination of a trust is undertaken to solve problems with the administration of the trust, not to change the beneficial interests in the trust.  For example, a modification which changes the trustee succession provisions of a trust or changes the situs of the trust should not be affected by CCA 202352018 because the trustee remains subject to the same duties to the beneficiaries and the beneficial interests remain the same.

Tax-free amounts for 2024

The tax-free amount for estates and the gift tax exclusion amounts are indexed for inflation, so they adjust each January 1.  For a person dying in 2024, an estate tax return is required and estate tax may be due if the decedent’s estate exceeds $13,610,000.  This is a $690,000 increase over the 2023 tax-free amount of $12,920,000.

The gift tax exclusion amount is the amount a person may give to a donee without having to file a gift tax return.  It is increased to $18,000 for 2024 gifts, up from $17,000.

For married persons, it may be a good idea to file an estate tax return even if the estate does not exceed the tax-free amount.  Doing so allows the deceased spouse’s unused exemption amount to be assigned to the surviving spouse.  The surviving spouse can add the unused exemption amount to his or her own tax-free amount, increasing the amount of property which may be left to family when the surviving spouse dies.

Unless Congress changes the law, the tax-free amount will be cut in half for persons dying in 2026 or later.  Thus, it will be closer to $7,000,000.  See the blog entry “Avoiding falling off the 2026 cliff” below for more information.

Avoiding falling off the 2026 cliff

Unless Congress changes the law, persons dying in 2026 or later will have only half of the pre-2026 tax-free amount before estate and gift taxes kick in.  How should estate planning lawyers approach this deadline with their clients? The closer the deadline comes, the greater the demands on lawyer time, CPA time and – probably most importantly -- appraiser time.

Can clients afford to wait until after the 2024 election? If the Republicans win the White House and both houses of Congress, then there is a good chance that the tax-free amount will not be cut in half.  There’s even a chance of total repeal of the estate tax.  Surely there is enough time for clients to wait for those results before implementing plans to address the possible halving of the tax-free amount. But if all clients wait, can everything for every client get done in one year or less?

Here are some guideposts to consider:

1. If married clients have taxable estates of $40 million or more, then working on a plan now and completing it in 2024 makes sense.  Unless there’s a total repeal, these clients are likely to have taxable estates. Planning now avoids last-minute jams and allows planning steps to be spread out if it is prudent to do so.

2. If married clients have taxable estates of $15 million to $40 million, have conversations now about the problem and basic planning options.  If the family circumstances are ideal, consider establishing family limited partnerships or similar entities and gifting options for descendants or trusts for descendants now, with fuller implementation following in 2025.

3. If married clients have taxable estates of $15 million or less, have conversations now about the problem and consider basic techniques such as annual exclusion gifts, but for most families it is too early to consider gifts to take advantage of the upper half of the tax-free giving range.  

4. Regardless of the size of the estate, if spousal lifetime access trusts (SLATs) are seriously being considered, start now so that there is more time to implement the plan and avoid the reciprocal trust doctrine.  SLATs are probably inappropriate for the majority of clients – especially those with more modest estates.

5. Appraiser capacity is going to be a problem.  Consider lining up appraisers for effective dates in early 2025 to get ahead in the queue.  Also, consider formula gifts based on appraisals not yet obtained.

QPRTs on the Rise?

As interest rates increase, QPRTs (qualified personal residence trusts) seem to be back on the table for clients with potentially taxable estates.  Here is a breakdown of some of the considerations for clients relative to a QPRT (see Treasury Regulation 25.2702-5).

The idea with a QPRT is that the grantor contributes a personal residence to an irrevocable trust.  The initial trust term is established on creation, typically at least 2 years.  The gift tax value that is reported on Form 709 in the year the trust is created is the fair market value of the residence on the date of the transfer, discounted by the value of the grantor’s occupancy term, based on the Section 7520 rate and the length of the trust.  There are excellent online calculators that can help with a rough analysis of a client’s situation (though the return preparer should double check the math by hand).  The longer the term and the higher the 7520 rate, the greater the discount.  The QPRT and any remainder trusts it creates are not GST-exempt (the grantor has the option of allocating GST exemption to the QPRT under the estate tax inclusion period (ETIP) rules, and might need to affirmatively opt out of automatic allocation, which is beyond the scope of this post).

During the initial trust term, the trust cannot hold any property other than the residence and a reasonable amount of cash to pay expenses.  The grantor has the right to live in the residence, rent free.  No one else may have the right to live there, other than the grantor’s spouse or dependent. 

After the term is over, the residence is transferred to one or more remainder beneficiaries (individuals or, more likely, trusts).  If the grantor wants to keep living in the residence, she must pay rent to the remainder beneficiaries (which is helpful because this further depletes the grantor’s taxable estate).  Using grantor trusts as the remainder beneficiaries will allow the rent to be received tax-free.

If the residence is sold during the initial trust term, the proceeds can be contributed to a new residence to be held in the QPRT within 2 years.  If no new residence is purchased or to the extent sale proceeds exceed the cost of the new residence, the QPRT converts to a GRAT (grantor retained annuity trust) and the trust must begin making annuity payments to the grantor.

If the grantor dies during the initial term, the residence is included in her estate at the undiscounted fair market value and the estate gets the exemption back that was used on the gift.  The ultimate outcome is basically no worse than if the plan hadn’t been undertaken, but the transaction costs and administrative inconvenience are wasted.

Some factors that might make a QPRT a bad choice: elderly or ill grantor, need for GST planning, lack of resources outside the trust to pay rent after the initial trust term, low basis of residence, low 7520 rate, uncooperative remainder beneficiaries.

QPRTs alone are not a good option for soaking up clients’ gift and estate tax exemption in anticipation of the potential exemption change in 2026.  The QPRT is designed to minimize the transfer tax cost associated with the transfer, and if a client has extra exemption they want to use before it’s gone, a simple gift to an irrevocable grantor trust will accomplish an estate tax freeze, allow the client to begin paying rent and shifting property out of the taxable estate right away, and allow the allocation of GST exemption while the client still has the hefty GST exemption amount available.  Much as we estate planners enjoy fancy techniques, sometimes simple still works best.

In other situations, especially when a client has used most or all of their exemption and they have a lengthy life expectancy, QPRTs can be efficient and relatively easy to administer.  If interest rates continue to rise and clients use their exemption on big leveraged gifts (or for post-2026 planning), we expect to talk about QPRTs a lot more.

2023 Legislative Update

1.      Introduction

The 88th Texas Legislature passed several bills which affect probate, guardianship and trust law. None of the changes were earth-shattering (earth-shattering like 2021’s 300-year rule against perpetuities bill; there’s a fairly low threshold for “earth shattering” when discussing probate legislation) but there are measures which will make the practice of law in this area easier and a few cautionary changes to be wary of.

Thanks go out to the late Bill Pargaman, who has given so much to the probate bar of Texas and whose legislative work assisted the author in coming up with this update. Here are links to Bill’s 2023 legislative update and 2023 legislative supplement.

2.      Certified Mail No Longer Required

Certified mail has become increasingly unreliable, yet the Estates Code was full of requirements that documents be sent by certified mail.  SB 1373 (probate) and SB 1457 (guardianships) took steps to alleviate this problem by allowing most notices which previously required certified mail to be sent by a “qualified delivery method.”  Qualified delivery method is defined in new Section 22.0295 of the Estates Code to mean delivery by (1) hand delivery by courier, with courier’s proof of delivery receipt, (2) certified or registered mail, return receipt requested, with return receipt, or (3) a private delivery service designated as a designated delivery service by the U. S. Treasury for delivery of tax documentation, with proof of delivery receipt.

This will permit using courier services for local delivery and designated delivery services like United Parcel Service and Federal Express for out-of-town delivery of virtually all notices previously required to be sent by certified mail, such as notices to beneficiaries under Chapter 308 of the Estates Code.  As of this writing, the designated delivery services (called designated private delivery services, or PDSs in federal jargon) include specific services of DHL Express, FedEx, and UPS.  Not every delivery service by these three providers is authorized; only the specific services under each that have been approved may be used.  You can check the most recent list on the IRS website here: https://www.irs.gov/filing/private-delivery-services-pds.

The new methods are available for cases filed on or after September 1, 2023.  Notices for cases filed prior to September 1, 2023, will have to be done under the former statute.

3.      Felon May Serve as Personal Representative with Court Approval

Under prior law persons convicted of a felony were disqualified to serve as personal representatives of estates.  SB 1373 changes this so that in limited circumstances a convicted felon may serve as personal representative.  Section 304.003 is amended to provide that a convicted felon is not disqualified from serving as executor if (1) the person is named as executor in the will, (2) the person is not otherwise disqualified from serving and (3) the court approves.

This will make it easier to administer estates where the testator knows the named executor is a convicted felon and is not bothered by that.  It is limited to cases in which there is a will naming the person, so a convicted felon still will not be eligible to serve in an intestate administration or in testate estates where he or she is not named.

This change applies to applications for letters testamentary filed on or after September 1, 2023.

4.      Purpose Trusts

Traditionally noncharitable trusts had to have an identifiable beneficiary in order to be effective.  This changed in a limited way in 2005, when the legislature authorized pet trusts (Trust Code Section 112.037).  HB 2333 expands this exception by adding Section 112.121 – 123 to the Trust Code to permit trusts “created for a noncharitable purpose without a definite or definitely ascertainable beneficiary.”  A purpose trust may include seeking economic or noneconomic benefits.

A purpose trust is enforced by one or more trust enforcers named in the trust instrument.  Trust enforcers are fiduciaries required to enforce the purpose and terms of the trust.  They have the same rights as beneficiaries provided under the Trust Code and common law, but they are not beneficiaries of the trust.  Trust enforcers are entitled to reasonable compensation.  The trust instrument may provide for successor trust enforcers.  If a purpose trust ends up with no trust enforcer, a court properly exercising jurisdiction shall appoint one.

The Uniform Trust Code has a provision allowing purpose trusts, and under the UTC the duration of the trust was limited to 21 years.  The Texas version has no such limitation, so presumably one may create a purpose trust lasting until the expiration of the perpetuities period in 300 years.  Everything in Texas truly is bigger and better.

5.      Conveyance to Trust

Wannabe lawyers learn in the basic wills and estates course in law school that a trust is a relationship, not an entity.  Title is held in the name of the trustee, not the trust.

Despite this, inexperienced and experienced practitioners alike frequently make conveyance to the So-and-So Trust, not to the trustee of the trust.  A federal district court from the Southern District of Texas in 2021 held that a deed to a named trust that does not name the trustee was null and void.  This rang alarm bells in the real estate community.  The district court decision was reversed in Fugedi v. Initram, Incorporated, No. 21-40365 in the United States Court of Appeals for the Fifth Circuit, which held that such a deed is not void.  Still, the Legislature wanted to address this issue once and for all so that conveyances to a trust are permissible under Texas law.

SB 801 adds Section 114.087 to the Trust Code, providing that the trustee of a trust is considered for all purposes to be the named party to an instrument that names the trust as a party, unless the trust is a legal entity under state law.  This change is effective as of the date of the original instrument and applies to instruments executed before, on or after September 1, 2023.  A correction instrument identifying the trustee may be filed but is not required.

Section 114.087 also provides that a certification of trust under Trust Code Section 114.086 that is recorded in the real property records is presumed to correctly identify the trust and the trustee and may be relied upon by a good faith purchaser or lender for value.  That goes beyond the protection afforded third parties in Section 114.086(h), which provides that a person who “in good faith enters into a transaction relying on a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification are correct.”

6.      Psychologists and Advanced Practice Registered Nurses Performing Guardianship Exams

Under prior law, psychologists could prepare Physician’s Certificates of Medical Examination (PCMEs) in guardianships if the incapacity resulted from a developmental disability but not for other types of incapacity, such as dementia in an elderly person.  SB 1624 amended Section 1101.103 of the Estates Code to permit a psychologist to examine the proposed ward and prepare the PCME if the proposed ward’s incapacity results from a mental condition.  If the incapacity results from a physical condition, a licensed physician must do the exam and provide the certificate.

The changes to Section 1101.103 made by SB 1624 further provide that the physician or psychologist who provides the PCME must have experience examining individuals with the physical or mental condition resulting in the alleged incapacity or have an established patient-provider relationship with the proposed ward.

The changes made by SB 1624 become effective September 1, 2023.

Another bill amended Section 1101.103.  HB 3009 amends the same subsections in an inconsistent way to permit advanced practice registered nurses to perform the exam and provide the PCME, but the PCME must be signed by the nurse’s supervising physician.

HB 3009 also is effective September 1, 2023.  Hopefully the changes will be read in harmony so that the intent of both bills is carried out.

7.      Reimbursement Claims Between Marital Estates

Previously a claim for reimbursement between two marital estates (such as reimbursement of the community estate by a spouse’s separate estate) was limited to a list of specific types of transactions, such as payment by one marital estate of the unsecured liabilities of another marital estate. HB 1547 drops the list of specific transactions in favor of a description of when the “benefited estate” must reimburse the “conferring estate”:  (1) If one or both spouses used property of the conferring estate to pay a debt, liability, or expense that “in equity and good conscience” should have been paid from the benefited estate’s property. (2) If one or both spouses used property of the conferring estate to make improvements on the benefited estate’s real property and the improvements resulted in an enhancement of the value of the property. (3) If one or both spouses used time, toil, talent, or effort to enhance the value of property of a spouse’s separate estate beyond that which was reasonably necessary to manage and preserve the spouse’s separate property, and for which the community estate did not receive adequate compensation.

8.      Other Decedent’s Estates Changes

a.      Creditors’ Claims and Community Property

SB 1373 amends Estates Code Section 101.052 to define what community property is liable for debts in a decedent’s estate. 

(1) For either spouse (the decedent spouse or the surviving spouse), that spouse’s sole management community property and the joint management community property continues to be subject to the liabilities of that spouse upon the death of either spouse.

(2) The undivided one-half interest that the surviving spouse owned in the deceased spouse’s sole management community property is subject to the liabilities of the surviving spouse on the death of his or her spouse.

(3) The undivided one-half interest that the deceased spouse owned in the surviving spouse’s sole management community property passes to the deceased spouse’s heirs or devisees charged with the liabilities of the deceased spouse.

This means that the liability rules change when one spouse dies.  For example, while both spouses are alive Spouse 1’s sole management community property (both halves) is not liable for the non-tort debt of Spouse 2, but upon the death of Spouse 2, one half of Spouse 1’s sole management community property is liable to Spouse 2’s creditors.

SB 1373 is effective September 1, 2023.

b.      Brokerage Accounts Can Be Multiple Party Accounts

Previously Chapter 113 of the Estates Code, with its rules about ownership of multiple party accounts, applied only to accounts with cash deposits.  Many practitioners and some courts applied the same rules to accounts holding securities, but the statute didn’t support this.  Now SB 1373 has amended Estates Code Section 113.001 to provide that accounts holding securities, including stocks, bonds, and mutual funds are “accounts” for Chapter 113 purposes.

c.       Affidavit of Heirship as Proof in Heirship Proceeding

SB 1373 amends Estates Code Section 202.151 to permit proof at an heirship proceeding to be provided by an affidavit of heirship meeting the requirements of Estates Code Section 203.001 instead of by live testimony or deposition testimony.  It remains to be seen if individual courts will accept this alternative method of proof.

This change applies to heirship proceedings commenced on or after September 1, 2023.

d.      Declaration Under Penalties of Perjury Instead of Notarized Oaths

Oaths of personal representatives under the Estates Code had to be sworn before a notary or other officer authorized to take oaths.  During Covid we learned that, while many documents which previously had to be notarized could be signed with unsworn declarations, oaths of personal representatives were not permitted as unsworn declarations.  Now SB 1373 has amended Estates Code Sections 305.051 – 305.053 to permit “oaths” of personal representatives to be made by unnotarized declarations under penalty of perjury.

The new procedure is available for proceedings commenced on or after September 1, 2023.

9.      Other Trust Changes

a.      Rule Against Perpetuities Cleanup

In 2021, Section 112.036 of the Trust Code was amended to adopt a 300-year perpetuities period for trusts.  This legislation created confusion on a few points, so HB 2196 cleans it up in a few ways.  First, instead of referring to the effective date of the trust, the statute now refers to the effective date of the trust instrument, which is the date it becomes irrevocable.  Second, if the interest of one trust is distributed to another trust with a different effective date, the effective date of that interest in the second trust becomes the earlier of the effective date of the two trusts. 

b.      Homesteads Owned by Trusts

Under prior law, Tax Code Section 11.13(j) permitted the ad valorem homestead tax exemption if a trust beneficiary has a right to use the residence “rent free and without charge except for taxes and other costs and expenses,” while Property Code Section 41.0021 provided homestead creditor protection if a trust beneficiary has a right to use the residence “at no cost … other than payment of taxes and other costs and expenses.” These now have been harmonized by making Section 41.0021 read “at no cost or rent free and without charge.”

c.       Spendthrift Protection with General Testamentary Power of Appointment

HB 2196 amends Section 112.035 of the Trust Code to provide that a beneficiary holding a general testamentary power of appointment is not treated as a settlor of the trust (and thus is not exposing the trust assets to the beneficiary’s creditors) merely because the beneficiary holds the general power or exercises the power in favor of the takers in default of the appointive assets.

d.      Decanting into the “Same” Trust

HB 2196 amends Section 112.0715, regarding decanting, to provide that the trust receiving the decanting (the “second trust”) can have the same name and the same federal tax ID number as the decanting trust.

10.   Other Guardianship Changes

a.      Small Transaction Exception to Guardianships Increased to $250,000

Prior law permitted certain actions, such as the sale of a minor’s interest in property, to take place without the need for a guardianship of the estate if the value of the interest was $100,000 or less.  SB 1457 raised this limit to $250,000.  Thus: (1) a minor’s interest in property may be sold without a guardianship if its value is $250,000 or less (Estates Code Section 1351.001); (2) an out-of-state ward’s interest in property may be sold without the appointment of a guardian in Texas if the value of the property is $250,000 or less (Section 1351.052); (3) a minor’s interest in a residential homestead may be mortgaged if its value is $250,000 or less (Section 1352.052); (4) the guardian of the person of a minor ward whose interest in a residence homestead is worth $250,000 or less may mortgage the interest without the appointment of a guardian of the estate (Section 1352.102); and (5) a resident or nonresident creditor with a liquidated claim of $250,000 or less may collect the claim without the need for a guardianship (Sections 1355.001 and 1355.002).

b.      Attorney ad Litem/Attorney for Ward

SB 1624 made changes to provisions regarding representation of the proposed ward by an attorney ad litem or private attorney. 

Estates Code Section 1054.001 previously required the appointment of an attorney ad litem “to represent the proposed ward’s interests.” Now the attorney ad litem is “to represent the proposed ward's interests, including the proposed ward’s expressed wishes.”  This makes explicit what has been implicit in this statute.  A similar change was made to Estates Code Section 1054.007.

Estates Code Section 1054.006 permits the proposed ward (or a ward in a restoration proceeding) to retain an attorney to represent him or her instead of an attorney ad litem.  If the proposed ward retains his or her own attorney, the court is required to remove the attorney ad litem.  Any party to the proceeding may file a motion challenging the proposed ward’s capacity to retain an attorney, and the burden of proof is on the moving party to prove lack of such capacity.

c.       Parent Serving as Guardian of Estate May Designate Successor

Under prior law the surviving parent of an adult incapacitated person who was serving as guardian of the person could designate a successor guardian of the person.  SB 1457 amended Section 1104.103 of the Estates Code to permit the designation of a successor guardian of the estate as well and provides that different persons may be designated as successor guardian of the person and guardian of the estate.

d.      Guardian of Person May Manage Up to $20,000

New Section 1151.0525 permits the court to authorize a guardian of the person where there is no guardian of the estate to manage up to $20,000 per year for the ward’s benefit.  The court is required to set an appropriate bond, and the guardian of the person must report the expenditures on his or her annual report.

e.      Compensation of Guardian of the Person

Under prior law the court could authorize a guardian of the person not also serving as guardian of the estate to receive compensation not to exceed five percent of the ward’s gross income.  Now Section 1155.002 has been amended to permit the court to award the greater of $3,000 or five percent of the ward’s gross income.

11.   Other Changes

a.      Disclaimer by Agent Under Power of Attorney

SB 1650 amends Property Code Section 240.008 to permit an agent under a durable power of attorney which authorizes disclaimers to disclaim property without court approval, even if the disclaimer results in property being paid to the agent.

b.      Removal of Remains

SB 1300 amends Health and Safety Code Sections 711.002 and 711.004 to permit the person authorized to control the disposition of one’s remains to consent to the removal of that person’s remains.

a.      Remote Notarization of “Wet” Signatures

Chapter 406 of the Government Code was amended to permit remote (online) notarization of wet ink signatures.

b.      New Statutory Probate Courts

The legislature authorized new statutory probate courts in Bexar, Cameron, Montgomery, Harris and Travis Counties.

308 Notices: Qualified Delivery to the Rescue

Often our clients are surprised to learn that when probating a will in Texas in an uncontested matter, an applicant is not required to give specific notice to anyone until after the will is admitted to probate.  Though the probate court must post notice that a will has been offered for probate, until the will is admitted to probate, no specific notice is required.

After a will is admitted to probate, under TEC section 308.002, a personal representative must give notice to the beneficiaries of the will.  Until the most recent session of the Texas legislature, the notice had to be sent by registered or certified mail, return receipt requested.  

In the past, proof of receipt by certified mail was the gold standard.  However, the mail “ain’t what it used to be.”  In more recent years, USPS delivery of certified mail is fraught with difficulties, and those problems have only worsened since the pandemic.  Sometimes letters are simply lost in the mail.  Many beneficiaries do not routinely go to the post office and can delay so long in signing for certified mail, the letters are returned unclaimed.  When we do receive the return receipt green cards, they are often unsigned, and many times they simply do not come back at all.  All of these issues may seem minor, but they regularly add administrative expense and cause lost time.

Timeliness is an issue because not later than the 90th day after the date of an order admitting a will to probate, the personal representative must file an affidavit stating that the required notices were given.  TEC 308.004(a).  Failure to timely file this affidavit is one ground for potential removal of an independent executor from their role as personal representative of the estate.  TEC 304.0035(a)(3).

In order to address the issue, we were increasing our use of waivers, but T-REP has come to the rescue with the new Qualified Delivery Method contained in SB 1373, which will become effective September 1, 2023.  SB 1373 amends the sections in the TEC requiring delivery by certified mail, including section 308, to allow for delivery by a qualified delivery method, which is defined as:

      Sec. 22.0295.  QUALIFIED DELIVERY METHOD. "Qualified delivery method" means delivery by:

                         (1)  hand delivery by courier, with courier's proof of delivery receipt;

                         (2)  certified or registered mail, return receipt requested, with return receipt; or

                         (3)  a private delivery service designated as a designated delivery service by the United States Secretary of the Treasury under Section 7502(f)(2), Internal Revenue Code of 1986, with proof of delivery receipt.

The changes to Section 308.002(d) apply to cases filed on or after September 1, 2023.

As of the writing of this post, the designated delivery services (called designated private delivery services, or PDSs in federal jargon) include specific services of DHL Express, FedEx, and UPS.  Not every delivery service by these three providers is authorized; only the specific services under each that have been approved may be used.  You can check the most recent list on the IRS website here: https://www.irs.gov/filing/private-delivery-services-pds

We’re looking forward to taking advantage of these new options and we hope they add a little extra efficiency for our probate clients.

Pending Legislation: These Changes Have Gone to the Governor

This is part of a series of blog posts about legislation pending in Texas.

We are getting to the point of the biennial legislative session where some bills have already passed both houses and are sitting on the Governor’s desk.  It is possible that he will veto one or more of these bills, but that is unlikely.  Thus, the following changes are likely to become law later this year.

Qualified Delivery Method -- Several notices related to decedent’s estates and guardianships which now require registered or certified mail soon may be delivered by hand delivery by courier with the courier’s proof of delivery receipt or by private delivery service such as Federal Express with proof of delivery receipt.  (SB 1373 and SB 1457) This will make it easier to accomplish service, now that return of certified mail green cards sometimes take forever.

Unsworn Declarations Instead of Oaths – Under current law, personal representatives must give an oath before the clerk or a notary public in order to serve.  Under SB 1373, they will be able to serve upon giving an unsworn declaration.

Community Property Liability in Estates – The Estates Code is clarified to provided that (a) all of the joint management community property and all of the deceased spouse’s sole management community property is subject to the liabilities of the deceased spouse, (b) the half of the deceased spouse’s sole management community property that was owned by the surviving spouse is subject to the liabilities of the surviving spouse, and (c) the half of the surviving spouse’s sole management community property that was owned by the deceased spouse “passes to the deceased spouse’s heirs or devisees charged with the liabilities of the deceased spouse.” (SB 1373)

Felons Serving as Executor – A felon may serve as executor of a decedent’s estate if (1) the person is named in the decedent’s will, (2) the person is otherwise qualified to serve as executor, and (3) the court approves. (SB 1373)

Disclaimers Under Powers of Attorney – Currently a disclaimer by a fiduciary which results in property passing to the person making the disclaimer must be approved by a court.  Under SB 1650, court approval no longer will be required if the disclaimer is authorized under the Durable Power of Attorney Act.

Tailoring Hot Powers

When the statutory durable power of appointment form changed in 2017, one of the major changes was the introduction of “hot powers”, a list of powers that the legislature deemed so extensive that a principal needed to affirmatively indicate her intention to grant them.  An agent is not able to exercise one of the hot powers unless the principal initialed them.  The statutory hot powers include changing inter vivos trusts, making gifts, creating or changing rights of survivorship, creating or changing beneficiary designations, and delegating the agent’s authority to another person.

Durable powers of attorney require a careful balance: avoiding guardianship and allowing for straightforward management of legal and financial matters for an incapacitated individual is incredibly important, but the more authority granted, the greater the potential harm if the power is abused.  The hot powers are some of the most dangerous if abused, largely because most of them would allow an agent to divert property away from the principal’s estate plan: creating and funding a revocable trust with different beneficiaries from the will, for instance, or adding and removing beneficiaries of a retirement plan.

Consider customizing the hot powers to find a middle ground.  At Karisch Jonas Law, after taking into account the client’s individual situation, we might limit the “hot” gift-giving power to a list of approved individuals, or describe a restricted set of actions the agent can take with respect to revocable trusts. 

For (potentially) nonprobate assets such as bank accounts, retirement plans, and life insurance policies, in appropriate cases we often alter the two relevant powers as follows:

____ Create or change Eliminate rights of survivorship

____ Create or change a beneficiary designation only to be consistent with the following disposition: (list client-approved beneficiary designation language)

With these changes, the agent retains the ability to “clean up” assets that were not properly addressed in the estate planning process, such as a joint account with right of survivorship benefiting only one of several children.  By giving the agent the power to eliminate the right of survivorship, the principal allows the agent to make the necessary change to prevent an unintended gift from being made outside the will, but does not allow the agent to divert property away from the will.  (Of course, this solution does not allow the agent to engage in probate-avoidance planning by adding survivorship provisions to probate assets.) 

Similarly, if a life insurance policy from the principal’s first job names the principal’s former boyfriend and the principal never got around to changing the designation before becoming incapacitated, the agent would be able to amend the beneficiary designation to be consistent with provisions the principal approved in the durable power of attorney.

Using hot powers can be a powerful but dangerous addition to a durable power of attorney.  It requires careful consideration and an experienced estate planning attorney’s assistance.  In some cases, leaving the hot powers broad is the best approach (probate avoidance planning, for example), while in others, the powers should be wholly eliminated.  For the less clear-cut situations, at Karisch Jonas Law we think that creative drafting can help strike a balance between unwieldy black and white options.

Pending Legislation: Purpose Trusts

This is part of a series of blog posts about legislation pending in Texas.

A Texas trust must have an ascertainable beneficiary (except for charitable trusts and pet trusts, which are specifically authorized by Section 112.037 of the Trust Code).  HB 2333, authored by Rep. Steve Allison (San Antonio), would permit a trust to be created for a noncharitable purpose without an ascertainable beneficiary.  It also would permit a “commercial legacy trust” for a commercial purpose, including seeking economic and noneconomic benefits.

Purpose trusts are not an entirely new concept. Section 409 of the Uniform Trust Code permits trusts created for noncharitable purposes without an ascertainable beneficiary.  But the UTC version limits the duration of such trusts to 21 years.  Rep. Allison’s version would have no such restriction, so presumably it could last for up to 300 years.  The UTC doesn’t specifically authorize commercial legacy trusts, but it appears to be broad enough to permit such a trust.

Under the proposed law, a purpose trust would have to have one or more trust enforcers, who would be charged with enforcing the purpose and terms of the trust. In addition, a commercial legacy trust may have a business committee, which would act more or less like the board of directors of the trust.  The trustee would be obligated to follow the instructions of the business committee in most matters.

While it might be fun as a trust lawyer to draft a purpose trust, they are potentially problematic – especially if they may last for 300 years.  Section 112.031 of the Trust Code prohibits trusts created for an illegal purpose and provides that the terms of the trust may not require the trustee to commit a criminal or tortious act or an act that is contrary to public policy.  Purpose trusts under the new law would be subject to these restrictions.  Beyond that, however, there are no restrictions as to the purpose of the trust.

This bill has been on file for a while and hasn’t been set for a hearing (as of March 29, 2023), so it isn’t clear if it is going to pass.

Pending Legislation: Are Electronic Wills in Your Future?

This is part of a series of blog posts about legislation pending in Texas.

Are you ready for electronic powers of attorney?  How about electronic wills?  SB 1779, sponsored by Sen. Tan Parker of Flower Mound, would enact the Uniform Electronic Estate Planning Documents Act (UEEPDA) in Texas.  The bill includes an add-on (the Uniform Electronic Wills Act) which would permit electronic wills.  It is pending in the Senate Jurisprudence Committee.

UEEPDA was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 2022 and is pending in three other states as well.  The Uniform Electronic Wills Act was promulgated by NCCUSL in 2019 and has been enacted in five states.

UEEPDA is a standalone act which can be adopted without the electronic wills act.  Sen. Parker opted to include both uniform acts in his bill.  One of the most controversial provisions of the acts would permit remote witnessing of estate planning documents – there would have to be video contact between the principal and the witnesses, but the witnesses would not have to be in the physical presence of the principal.  That’s a bridge too far for some states, which allow electronic documents but require witnesses to be in the physical presence of the principal.

The Texas Real Estate and Probate Institute (T-REP) does not support the bill, but it has a version which Texanizes the uniform acts.  For example, it doesn’t provide for an entirely new self-proving affidavit for electronic wills; rather, it refers to the form and statutes already a part of Texas law.  T-REP also wishes to require witnesses to be in the physical presence of the principal.

At this point in the session, it is impossible to predict SB 1779’s likelihood of passage.

Execution Day: Practicalities of Signing Estate Planning Documents

After carefully drafting and explaining legal documents that reflect a client’s wishes for their disability and death planning, an estate planning lawyer faces a very important job that is often considered an afterthought – supervising the proper execution of the documents.  The COVID-19 pandemic highlighted how inflexible this requirement is; when most other parts of the process were able to successfully shift to remote collaboration, the documents still had to be physically signed, which led to plenty of creative solutions (how many of us had to parse dozens of blurry pages photographed by a cell phone camera to complete the temporary remote will-signing procedure?).  Clients are often surprised that signing the documents is such a rigid experience, so it helps to explain the formality early in the estate planning process.

The little things that can catch practitioners off guard are too plentiful to list, but the following are a few commonly-encountered hurdles to a smooth will execution meeting.

For wills, keeping track of which document is the original is crucial.  With an older document and black ink, it can be surprisingly difficult to determine whether a document is an original or a high-quality copy.  At Karisch Jonas Law, it is our practice to insist on the use of our preferred blue ball-point pen for every document signing; on the rare occasions that a contraband pen (even once a purple one!) is used, there is inevitably an issue with scanning, smearing, or legibility, so we have chosen to provide our own pens at the beginning of the signing meeting.

The 2017 legislative changes for durable powers of attorney included a requirement that the so-called “hot powers” must be specifically initialed in order to be effective.  That change meant that a client could not simply sign on the dotted line in most cases, because initials are needed throughout the document to make thoughtful selections.  Practitioners may disagree about the benefits of this change in format, but for most of us, the time needed to complete this document has significantly extended the signing meeting.  Previewing the options in the initial meeting, pointing out the optional language in the drafts, and designating the client’s previously-stated selections with stickers on the execution document can all help streamline the process while ensuring that the client is making informed decisions on this important document.

Clients are often thrown when they reach the first signature line bearing their full legal name: remembering how to write one’s middle name in cursive would prompt stage fright in anyone, especially with three legal professionals looking on.  It is helpful to remember that the signature requirement for a will under Texas law is quite forgiving: any mark made by the testator with the intent of signing the will can be adequate, and the testator may even direct someone else to sign for them.  In most cases, it is best for the client to sign their usual signature; if there is a question of forgery or the self-proving affidavit fails, it will be helpful for the signature to be recognizable to a third party who is familiar with the client’s handwriting.  For the notary, this is a different story, as the signed name on a notarial certificate must match the name listed on the notary’s commission.  A very wise legal assistant once counseled that the best approach here is to obtain a certificate based on the notary’s established signature to avoid the middle-name snafu mentioned above.

Announcing Karisch Jonas Law

Julia Jonas has become a partner of the firm, and the firm has changed its name to Karisch Jonas Law, PLLC.  Julia has 11 years of experience, is Board Certified in Estate Planning and Probate Law and is in charge of estate planning at the firm.  Glenn Karisch continues to actively work in estate planning, and also handles estate and trust administration issues and fiduciary disputes. Melissa Harvey has primary responsibility for probate and trust administration matters.

Karisch Jonas Law continues to be a full-service estate planning, probate and trust law firm.  Its attorneys have the experience and expertise to handle projects ranging from simple to complex. Consider the firm for your estate planning, probate and trust needs.

2023 Tax-Free Amounts

The tax-free amount for estates and the gift tax exclusion amounts are indexed for inflation, so they adjust each January 1.  For persons dying in 2023, if their estates exceed $12,920,000, an estate tax return is required and estate tax may be due.  This is an $860,000 increase over the 2022 tax-free amount of $12,060,000.

The gift tax exclusion amount increases to $17,000 for gifts made in 2023, up from $16,000 for 2022.

Beginning for persons dying in 2026, the estate tax-free amount will be cut in half unless Congress changes the law before then.  Thus, after 2025, the tax-free amount will be closer to $6,500,000, although the exact amount is not now known due to the inflation adjustment.  This creates an estate planning problem – or opportunity – between now and the end of 2025.

For married persons, even if the estate of the first spouse to die is less than the tax-free amount, an estate tax return may be a good idea for portability purposes.  If a return is filed, the unused exemption amount can be assigned to the surviving spouse and added to the surviving spouse’s own tax-free amount.  Because of the scheduled halving of the tax-free amount in 2026, filing a return and claiming the unused exemption amount could be important to save future taxes.