Author: jeffmatthews

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Gifts: No Annual Limit or Taxes for Most of Us

There are popular misconceptions concerning limits and taxes applicable to gifts.  I’ll get straight to the point:  Unless you are very wealthy, there will be no tax of any kind associated with gifting.

Recipients of gifts never pay a tax on the gift under any circumstances.  If there is to be a tax on a gift, it is paid by the estate of the donor when he dies.

Here’s how it works:

There is a federal estate tax which applies only to very wealthy people.   It is calculated based on the wealth the donor owns at the time of death, plus the wealth he gave away while he was alive.

Why are gifts added?  To close a loophole.

Imagine being worth $100 million and giving it all away on your deathbed to avoid paying taxes.  The IRS isn’t going to have any of that.  So, they count your gifts, too.  However, they only count gifts to the extent they exceed the annual exclusion in the year given.  This allows wealthy people to make fairly generous gifts each year and to also avoid a limited amount of estate taxes.

The 2024 annual gift exclusion is $18,000 per donee.  If you give $100,000 to your child, you must report it to the IRS since it exceeds the exclusion.  This doesn’t mean you will be taxed.  It only means that in 2024, you gave $82,000 in value that will be taxed only if you are rich enough.

How rich?

The federal estate tax kicks in at $13.61 million for single individuals and $27.22 million for married couples.  These figures are known as the “unified federal estate tax credit.”  The excess $82,000 will only be taxed if you are over the unified credit when you die.  Otherwise, it’s completely tax free.

The bottom line is that unless you are very wealthy, you can give it all away anytime you want, and nobody will pay any gift taxes.  But be very careful when making gifts.  You don’t want to lose a valuable step-up in basis.  You can read about the step-up here.

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Muniments of Title: A Quicker, Cheaper Type of Probate Proceeding

I am often asked to explain the benefits to be derived from probating wills as muniments of title when it can be done that way.  Here is a recent explanation I gave:
You asked what an estate administration is.   It’s a process of settling the debts of a decedent and distributing any remaining property to his beneficiaries.  It’s very much like a bankruptcy proceeding or liquidation process.
An estate administration requires following a rule-based process of liquidation, which includes publishing notice to creditors in the newspaper to advise them to submit their claims to the executor.  In addition, secured creditors have to be provided notice by certified mail to make their claims against the estate.  There is a period of time which must pass for all this process to complete.  During that time, the executor must also file a formal Inventory, Appraisement and List of Claims with the court (or documents in lieu thereof, provided the executor represents to the court that the Inventory has been completed and will be made available to creditors and estate beneficiaries).  All of this requires time, paperwork and money.  It shouldn’t be hugely expensive, but still, it’s work that is unnecessary and which prevents wrapping up the estate quickly.
My understanding is there are no debts other than the mortgage and a few unpaid bills that don’t add up to a lot.
As you can see, the procedure of estate administration is geared toward paying creditors before distributing what remains.  If there are no creditors, then there’s no need to publish notices to them and to send them letters in the mail, etc.  There’s no need to wait a certain amount of time to see if anyone out there submits a claim.  There will be no need for the executor to approve or deny claims, etc.
When there are no debts, other than debts secured by real estate, there’s a simplified type of probate available called a “muniment of title.” This is not a typo, and I didn’t mean to say, “monument.”  It’s pronounced:  myoon-a-mint.
I’ll show you the statute in a second, but basically, when a will is admitted to probate as a muniment of title, no administration is had on the estate.  The court simply enters an order to the effect that the decedent’s property is now owned by the people named in the will.  This order is all the authority you need to demonstrate to the world that you are now the owners of the property.  Think of the order as chaining the title of your father’s assets to you.  The order proves your ownership.
Once an order is entered admitting a will to probate as a muniment of title, the estate proceeding is closed.  There’s nothing further to do.  The order constitutes authority for third parties to treat you as the owners and deal with you, directly, rather than with an executor going through an administration.
You can take a look at Chapter 257 of the Texas Estates Code, allowing for probate as a muniment of title.  Section 257.102 describes the effect of the order as I stated above.
All of the provisions dealing with estate administration are contained in Subtitles G, H and I of the Texas Estates Code.  If you want to look those up, the table of contents of all the Texas statutes is here.  You’ll probably not want to read too much there, but suffice it to say, among all those statutes are all the requirements of an administration – all of which are avoided if a will is admitted to probate as a muniment of title.
So, pay off the small debts so we can tell the court that there are no debts other than debts secured by real estate.  Then, we can authorize the court to admit the will to probate as a muniment of title.
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Will Drafting – Dealing with Abatement of Bequests

Abatement of gifts is an issue that can be anywhere from unimportant to extremely important, depending on individual circumstances.  The amount of your wealth is not what makes the difference.

Abatement occurs when debts and expenses of administration must be paid.  The law does not assume that all of your beneficiaries must share the debts and expenses equally.  The money has to come from somewhere.  So, whose shares pay what amounts?

This might already be a little confusing.  Here is a simple situation to make the point:

Suppose your will says, “I leave my home to Allan and everything else to Beth.”  This simple expression does not tell us whether you intend Allan and Beth to receive an equal value or not.  We know nothing about the worth of the home, nor do we know the value of everything else.

To keep it simple, let’s say the home is worth $300,000, and everything else is worth $300,000.  You intend to treat Allan and Beth equally.

Note that the respective values can change a lot over time, and while the intent at the time of making the will is to treat Allan and Beth equally, later changes in value can make the disposition very unequal.  For now, let’s assume the values never change.  Equality is assured… or is it?

The answer is, “Definitely not.”  At the time of passing, if you have debts, other than a mortgage or lien on your home, the law assumes you want Beth to pay all of them out of her share.  Similarly, the law assumes you want Beth to pay all of the expenses of estate administration out of her share.

Let’s assume your home is paid for.  You have $5,000 in credit card debt; $30,000 in medical bills related to your final illness; and $15,000 in funeral expenses.  $5,000 will be required to pay an attorney and other expenses of estate administration.

Beth pays all of these.  That’s $55,000.  The net result is Allan receives $300,000 in value from your estate, and Beth receives $245,000.

Instead of medical bills being only $30,000, let’s assume they were $350,000.  In this case, we now have a total of $375,000 in debts and expenses.  Beth’s share is exhausted.  There remains unpaid indebtedness of $75,000.  Allan’s home must be sold.  Assuming no closing costs, he’ll receive $225,000 after the creditors are all paid.

As you can see, this is what happens with simple estates.  Imagine what’s involved as giving becomes a little more complicated.  Now, you can appreciate how rules of abatement can adversely impact even the simplest plan.

The failsafe approach to treating a group of beneficiaries equally is to avoid bequests and devises when possible.  Treat your entire estate as the residue and leave it in fractional shares or percentages.

The simplest example is, “I leave everything to Allan and Beth in equal shares.”  Notice that now, there’s no distinction between the type or description of property between the 2 recipients.  They get exactly the same thing.  In addition, later changes in the value of specific property will not affect the value that both Allan and Beth will receive.

Bequests, devises and residue are important concepts when it comes to abatement.  All of these are gifts made in your will, but devises hold a higher status than bequests.  Bequests hold a higher status than the residue.

Devises are gifts of real property outside of the estate’s residue.  Bequests are gifts of personal property outside of the residue.  The residue is everything which remains after all bequests and devises are made.

As you can see, Texas law places a higher status on real property than personal property.  There’s probably not a great reason for this distinction.  However, it’s the rule.

The best way to understand how bequests, devises and the residue are related comes from our simple example above.    You can see that your will made a devise of your home to Allan, and it left the residue to Beth.

Since the devise to Allan enjoys a higher status than Beth’s residue, Beth gets stuck with the debts and expenses.  As I stated above, if your intent is to treat Allan and Beth equally, the best way is to avoid the devise to Allan.  Again, your will could simply state, “I leave everything to Allan and Beth in equal shares.”

If you can be satisfied with a will like this, it’s definitely the way to go.  However, there might be compelling reasons which drive you to want to make some devises or bequests.  A good example would be a bequest of money to your favorite charity – “I leave the sum of $10,000 to my church (we’ll keep the name generic), and I leave everything else to Allan and Beth in equal shares.”

Obviously, if you want to leave $10,000 to your church, there’s no way to avoid a bequest.   By now, you know the law assumes that the church’s share will not be reduced by any of your estate’s debts and expenses until the residue is first exhausted.

The bequest to the church is a good example to lead into one more nuance – that is, whether a bequest (or devise) is specific or general.  A gift (whether it is a bequest or devise) is specific if it can be satisfied without coming from other property.  In our original example, the gift of the home to Allan is a special devise.  The home is the gift, itself.

The gift to the church, on the other hand, is of money.  It is a general bequest because it will have to come from other property in order to be satisfied.

The rule is that specific bequests and devises take priority over general bequests and devises.

Got it?  Good!

There’s one final nuance.  Intestacy.

Intestacy occurs when property of your estate is not disposed by your will.  Intestacy is a real concern, but it is beyond the scope of this article.  Here’s an example just to keep it as simple as possible:  “I leave everything to my friend, Bob.”

This will fails to state what happens if Bob fails to survive you.  Where does your stuff go?  Actually, we’re not going to answer that question here, but now, you can see how intestacy occurs even when you have a will.

You’ve learned a heck of a lot if you’ve understood everything so far.  So, without further ado, here’s Section 355.109 of the Texas Estates Code:

ABATEMENT OF BEQUESTS. (a) Except as provided by Subsections (b), (c), and (d), a decedent’s property is liable for debts and expenses of administration other than estate taxes, and bequests abate in the following order:

(1) property not disposed of by will, but passing by intestacy;

(2) personal property of the residuary estate;

(3) real property of the residuary estate;

(4) general bequests of personal property;

(5) general devises of real property;

(6) specific bequests of personal property; and

(7) specific devises of real property.

(b) This section does not affect the requirements for payment of a claim of a secured creditor who elects to have the claim continued as a preferred debt and lien against specific property under Subchapter D.

(c) A decedent’s intent expressed in a will controls over the abatement of bequests provided by this section.

(d) This section does not apply to the payment of estate taxes under Subchapter A, Chapter 124.

Did you see subsection (c)?  This is your “out” if you don’t like the way Section 355.109 works.

In our original example (“I leave my home to Allan and everything else to Beth.”), I showed that one way to obtain equal treatment (if that’s the goal) is to remove the devise to Allen and instead, to leave everything to Allan and Beth in equal shares.

But what if you’d really prefer to leave the gifts like you had them in the first example?  No problem.  Your will could contain an optional provision overriding the default rule, like this:

I leave my home to Allan and everything else to Beth.

I direct that all gifts herein shall abate in proportion to their values.

Now, Allen pays half of the debts and expenses from his share, and Beth pays half from hers.  (Just remember, the values can change later, and the result will vary.)

We can also add the special bequest of $10,000 to the church without any reduction for debts and expenses.   Your will now reads:

I leave $10,000 to my church.

I leave my home to Allan and everything else to Beth.

I direct that all gifts herein, other than general bequests, shall abate in proportion to their values.

We’ve covered a lot, but there’s one more thing.  What if there’s a mortgage on the home of say, $100,000?  Section 255.301 of the Texas Estates Code provides:

NO RIGHT TO EXONERATION OF DEBTS. Except as provided by Section 255.302, a specific devise passes to the devisee subject to each debt secured by the property that exists on the date of the testator’s death, and the devisee is not entitled to exoneration from the testator’s estate for payment of the debt.

However, you can change this result if you like. Section 255.302 states:

EXCEPTION. A specific devise does not pass to the devisee subject to a debt described by Section 255.301 if the will in which the devise is made specifically states that the devise passes without being subject to the debt. A general provision in the will stating that debts are to be paid is not a specific statement for purposes of this section.

Using our example, Allan will have to pay the $100,000 mortgage on the home all by himself unless your will states other property should be used to pay it.

These are just a few of the limitless possibilities when it comes to planning for abatement of gifts.  This article should not be understood to suggest that altering the statutory rule is always a better approach.  It’s only better when it accomplishes a purpose that the statute’s default rules cannot.  Once you decide on your goal, the trick is to use the proper tools to achieve it.

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LA Supreme Court: DIY Wills are a Bad Idea

With the proliferation of legal forms on the internet, people often consider doing their own wills to try to save money.   If you’re not a trained lawyer, you probably assume the wills you find on the net meet legal requirements just because “they’re there.”  That is a very dangerous assumption as you are getting ready to see.

The 2017 case of Toney, out of Louisiana, is the perfect example to bring this point home.  In Toney, the Louisiana Supreme Court denied probate of a will which a non-lawyer scraped off the internet and tried to customize.

The will’s attestation clause and self-proving affidavit looked valid and would probably fool 10 out of 10 non-lawyers.  They had all the legal-sounding jargon everyone expects to see.

The attestation clause of the will stated:

We, the undersigned, hereby certify that the above instrument, which consists of 3 pages, including the page(s) which contain the witness signatures, was signed in our sight and presence by Ronnie R. Toney (the “testator”), who declared this instrument to be his/her Last Will and Testament and we, at the Testator’s request and in the Testator’s sight and presence, and in the sight and presence of each other, do hereby subscribe our names as witnesses on the date shown above.

The self-proving affidavit stated:

I, Ronnie R. Toney, the Testator, sign my name to this instrument this 2 day of August, 2014, and being first duly sworn, do hereby declare to the undersigned authority that I sign and execute this instrument as my Will and that I sign it willingly, in the presence of the undersigned witnesses, that I execute it as my free and voluntary act for the purposes expressed in the Will, and that I am eighteen years of age or older, of sound mind, and under no constraint or undue influence.

Testator Signature: Ronnie R. Toney [signed]

Ronnie R. Toney

We, Angela Dutel and Robert A. Davis and William Orazio, the witnesses, sign our names to this instrument, being first duly sworn, and do hereby declare to the undersigned authority that the Testator signs and executes this instrument as the Testator’s will and that the Testator signs it willingly, and that the Testator executes it as the Testator’s free and voluntary act for the purposes expressed in the will, and that each of us, in the presence and hearing of the Testator, at the Testator’s request, and in the presence of each other, hereby signs this will, on the date of the instrument, as witnesses to the Testator’s signing, and that to the best of our knowledge the Testator is eighteen years of age or older, of sound mind and memory, and under no constraint or undue influence, and the witnesses are of adult age and otherwise competent to be witnesses.

Can you spot anything wrong in those 2 passages? I doubt it. However, the Court found the issues and started its discussion by telling us what the requirements are for a valid will:

In Succession of Brown, 458 So.2d 140, 143 (La.App. 1 Cir. 1984), the First Circuit succinctly summarized the three required elements of a valid attestation clause under La. R.S. 9:2442(B)(2), La Civ. Code. art. 1577(2)’s similarly-worded counterpart, as follows:

The attestation clause set forth in the statute… requires the notary and witnesses to declare (1) the testator signed the will at its end and on each separate page, (2) the testator declared in the presence of the notary and witnesses that it (the instrument) was his will, and 3) in the presences of the testator and each other, they (the notary and witnesses) signed their names on a specified date.

(Emphasis in original.) In this case, none of these three requirements is fully met.  As to the first requirement, although the third page of the will states it “was signed in our [the three witnesses’] sight and presence,” it does not mention that the will was signed on each separate page as specified in the sample attestation clause.

Additionally, neither the will nor the affidavit contains a declaration that the notary viewed the will being signed (only the affidavit is notarized). Similarly, as to the second clause, although the witnesses signed a clause affirming that the testator “declared this instrument to be his/her Last Will and Testament,” the notary made no such declaration. Finally, as to the third requirement, although the witnesses declare “to the undersigned authority… that each of us, in the presence and hearing of the Testator … and in the presence of each other, hereby signs this will, on the date of the instrument” (emphasis added), the witnesses do not mention signing the will in the presence of the notary…

In his brief, the applicant suggests that the testament at issue originated from a form found on the internet. This hypothesis is supported by the appearance of the word “COUNTY” in the affidavit. Although we are sympathetic to the fact that a testator could errantly use such a form in ignorance, to hold the propounded testament in substantial compliance with La. Civ.Code. art. 1577 would essentially negate any value to the distinct form requirements which our legislature has chosen to put in place.

So there you have it.  Toney officially died without a will.   That had to feel like a punch in the gut for the people he named as his beneficiaries.

Most estate-planning documents are fairly straight-forward and won’t break the bank to have a qualified attorney prepare.

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Step-Children and No Will: A Recipe for Disaster

Do you or your spouse have step-children?  Do you want to leave part of your estate to your step-children (for example, if your spouse predeceases you)?  Then, you better have a will.

Before further discussion, it is helpful to know that persons who die without wills are said to be “intestate.”  This word is used in statutes referenced below.

Unmarried Persons with Step-Children

What if you’re not married but you have step-children?  What part of your estate will they get if you die without a will?  Section 201.001 of the Texas Estates Code answers this question.  And the answer is…

Zip.  Zero.  Nada!

Married Persons with Step-Children

If you’re married, we have to look to Sections 201.002 and 201.003 of the Texas Estates Code.  Section 201.002 deals with a decedent’s separate property, while Section 201.003 deals with a decedent’s community property.

Community property is actually defined by what it is not.  Section 3.002 of the Texas Family Code states, “Community property consists of the property, other than separate property, acquired by either spouse during marriage.”  If you are not married, you do not have community property.

Separate property is defined in Section 3.001 of the Texas Family Code.  A spouse’s separate property consists of:

(1) the property owned or claimed by the spouse before marriage;

(2) the property acquired by the spouse during marriage by gift, devise, or descent; and

(3) the recovery for personal injuries sustained by the spouse during  marriage, except any recovery for loss of earning capacity during marriage.

There are many nuances to these general rules.  For example, income earned from separate property is community property.  Also, property acquired from the proceeds or disposition of separate property remains separate property.  This article does not attempt to cover all the nuances relating to characterization of property as “community” or “separate.”

Looking at Sections 201.002 and 201.003 of the Texas Estates Code, we can see the same result.  Step-children get a goose egg.  Nothing.

Conclusion

If you or your spouse has step-children and you want to leave any part of your estate to them, you must have a proper will.  If you fail to plan properly, the only thing they’ll be entitled to is disappointment.

 

 

 

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The Case against Survivorship Accounts

I have had numerous clients tell me over the years that they’re not sure who they designated as beneficiaries on their checking, savings, investment and retirement accounts.   Many are not even sure whether they named any beneficiaries.

When something changes in life for them (a divorce, death of a spouse, death of a child, or just changing their mind about how to leave their assets, etc.), they have to wonder about all the places where they have to go and fix the beneficiary designations.

Contrast that approach with the traditional, simple will.  If all of your accounts are payable to your estate, they simply go to whomever you designate in your will.  That’s much smarter because it’s much more efficient.  It’s much less prone to errors.  Errors in estate-planning can be very costly.  The simpler, the better.  Just have a will and update it (and only it) as necessary.  Do not set up beneficiary designations on your accounts.  That way, they will all go to your estate by default.  You will never have to update them.

The argument against my advice is that, “Probate is slow and costly.”  It’s not.  In most cases, an executor in a will can get letters testamentary within 3-4 weeks.  It’s a largely bureaucratic process that is pretty automatic.

I would suggest that if a “survivorship account” is necessary, there should be only one, and it should be just for normal expenses for a few months, or so.

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A Compelling Case for Safe Dividend Stocks

Are you disappointed that banks will not pay decent rates on CD’s anymore?  Does the stock market bubble scare you?  If you could put your money in a 7.3% CD, would you do it?

A 7.3% CD would be a dream come true for many people, but would it intrigue you to know that from an investor’s perspective, a dividend can be a far better investment than a CD ever was?

First, let me say I am not writing this article to try to become an investment advisor or manager.  My reason is to take a break from writing on legal topics and mix things up a bit.  Nothing that follows is legal or investment advice.  You’re on your own.  Take it for what it’s worth and consult your investment advisor.

Why did CD Rates Fall?

Does anyone remember the “good, old” days when CD’s paid 5% and more?  In those good, old days, people were also paying 8%+ interest to purchase their homes and 10%+ to buy cars.

The power of the Fed is practically unfettered.  It can change the direction of the entire economy with the twist of a knob.   Uncle Sam loves homeowners and wants people to be able to afford a reliable car to get to work.  All of this translates into more taxable income to the government.

Over the last couple of decades, we’ve witnessed the plan in action.  Interest rates have dropped, time and again, to today’s all-time lows.  When it comes to CD’s, banks are in the business of lending, not borrowing.

A CD is the bank’s way of borrowing in order to turn around and loan the borrowed money to a consumer at a higher interest rate.  It earns profit on the spread.  A banks is not going to pay 5% on CD’s and lend you the money back at 2.8%.  That would put the “bank” in “bankruptcy.”  (pun intended)

Recently, the Fed announced that we should not expect interest rates to rise anytime soon.  So, don’t expect CD rates to rise, either.

Annuities

An annuity is a stream of future payments.  Think of it like a weekly allowance.  If we could, we would all like to set a weekly allowance and know we will get it the rest of our lives.  Wouldn’t that be perfect?  The problem is you can’t find too many savvy people making financial promises that last forever.

If I promise you an allowance of $20 per week for the next 5 years, you own an annuity.

In the financial sector, annuities are purchased and sold all the time – just like people buy and sell gold, stocks, etc.

Using the example from above, you now own a 5 year annuity.  How much can you get for it if you want to sell it now for cash?

It’s $20 * 52 weeks * 5 years = $5,200 in payments, but they are spread out over the future.  That annuity will be worth less than $5,200 today.  Maybe $4,500 if the maker of the promise (that’s me) is a good keeper of its promises.  Maybe $2,000 if the maker is not so reliable.  Let’s say I’m reliable, and the odds are very high I will pay the $20 per week.  Your annuity is worth $4,500.

Suppose I upped my offer.  I will now offer to pay you $20 per week for the next 10 years.  This will definitely add more value to your annuity.  You could sell it for almost double the price – maybe $7,500.  The reason it’s not doubled is because $20 paid 10 years from now isn’t going to be as good as $20 paid 5 years from now.  There is a time-decay factor in the value.

CD’s and other annuity-like investments typically have limited time periods.  They expire in 1 year, 3 years, 5 years, etc.  Upon expiration, the banks can take a look at current interest rates and modify the new offerings.   As you can see, the banking and lending sector is all interest rate driven.

When interest rates are really high, CD owners laugh at corporate shareholders who earn their measly dividends.  When interest rates are low, the shoe is on the other foot.

Moreover, a solid dividend does not fluctuate as interest rates change.  Nor does it fluctuate when stock prices change.  You can pass it down to your kids, and they can pass it along to their grandkids.  In theory, the dividend can be forever.  Think of it as an annuity in perpetuity.

There is an extremely simple formula used to determine today’s value of an annuity in perpetuity:  Price / Yield.

Let’s use a simpler annuity so that we can show quickly how this formula works.  Assume an annuity which pays $10,000 per year in perpetuity.  Let’s say I am a buyer of annuities and I like to earn 7% on my money.  I don’t want to take stock market risks, where returns are up and down all the time.  I would be happy just to get 7% for the rest of my life.

For the $10,000 annuity in perpetuity, I will pay $10,000 / .07 = $142,857.14.

Dividends – What they are

Dividends are sums of cash which corporations might pay to their shareholders from time to time.  There is not a law requiring any company to pay dividends.  Companies choose to pay dividends as a matter of internal policy, which is voted on by their boards of directors.

For example, newer, growth-oriented companies tend not to pay dividends.  This is because they are trying to grow.  They need all their cash to invest in growth.  Rather than looking for dividend income, shareholders in these growth companies are hoping the stock prices quickly double, triple or quadruple.  It can be very lucrative in a short amount of time, but the catch is that it is risky, too.  What if the company’s management makes a wrong decision with the cash?  For example, what if management uses the company’s cash and combines it with debt to buy  a competitor at a high price, only to be run out of business a year later by a different competitor which offers better products or services?  Ughhh!  It happens.

Now, let’s contrast growth stocks with cash cow stocks.  There are very old, well-established businesses that have been around for over 100 years.  They aren’t trying to grow by leaps and bounds.  Those days are mostly over, even though they still try to retain their market share as much as possible.  These are huge companies that make a lot of money.

Take AT&T, for example.  It’s ticker symbol is T.  It’s a cash cow.  It tries to keep up by innovating into different segments.  It has moved into wireless service, for example.  It also bought HBO and Time Warner, among other things.

You can look at all kinds of information on T’s stock from many sources all over the internet, including here.  However, you might want to keep reading a bit before clicking the link.

Where does T’s money go since it doesn’t need all of it for growth?  To the shareholders, of course!   The money T pays to its shareholders is called “dividends.”

Stability of Dividends

Remember, just because a company pays dividends does not mean that you have a legal right to depend on those dividends.  There are many companies which pay dividends sporadically and in varying amounts.  You can’t count on them.

On the other hand, there are also companies that pay very stable, predictable dividends.  You can count on them like clockwork.  T is one.  To the extent T can be counted on for many years to come, its dividends operate much more like an annuity in perpetuity.  Remember our super, simple formula from above?  We’re going to use it to figure out what T’s dividends are worth.  (You will be able to use this same method on any other stock you want.)

Understanding Yield

Before we jump into specifics, it’s a good idea to get the simple concept of yield across in a way that is clearly understandable.  Yield is the rate of return that the shareholder receives from dividends.  Yield is just stock-speak for “interest rate.”

Laypersons use these terms interchangeably, making it possibly confusing.  The better approach is probably to think of it like this:  Lenders earn yields, and borrowers pay interest.  The rest of what follows discusses this investing topic in terms of yield – so you can take a look at it as if you are in the position of being a banker, not a debtor.

When you look at a stock’s overview on the internet, you will see a section providing a short snippet which says how much dividend the stock pays and what its effective yield is.  For example, a notation might state:  $2.08 (7.265%).  The $2.08 is  the dividend, and the 7.265% is its yield.  Be aware that some sites show you the annual dividend, and others show you the quarterly dividend.   So, if you see $0.52 for T, you now know why.

Remember our super, simple formula?  Let’s use it to figure the stock’s price.  “Say what?,” some of you might ask.  How can I tell you the stock’s price with this information?  Here it is again:  $2.08 / .07265 = $28.63.  The stock is selling for $28.63.

It so happens T’s current price is $28.63 per share.  It currently pays $0.52 in dividends every quarter (3 months) for each share.  For the $28.63 I paid, I will receive (at least) $2.08 per year in dividend income for as long as I continue to own the stock.

T’s yield is therefore $2.08 / $28.63 = 7.265%.  With one minor exception, I’ll just round it to 7.3% from here forward.

What this means is that so long as you continue to receive $2.08 from T each year on your original $28.63 invested, it’s the same as putting your money into a bank CD which pays 7.3% interest forever!  These days, that’s a heckuva good CD!  You will not find one, though.

Yield is Locked-in Permanently When You Buy the Stock

As stated above, CD’s are usually for a limited duration – usually 1 to 2 years. Take a look at today’s crappy rates here.  Is that a joke or what?

T’s dividends, on the other hand, are for as long as it continues to pay them and as long as you continue to own the stock.  It’s kind of like buying a 7.3% CD that lasts as long as you want, rather than a CD that expires and has to be replaced every other year with a possibly lower rate.

T is on the prestigious list of “Dividend Aristocrats.”  A dividend aristocrat is a large company which has increased its dividend payment for at least 25 consecutive years.  You can see the list here.

T has increased its dividend each year for 37 consecutive years.  See here.  That’s more stable than most banks, many of which have come and gone.

In 2021, T’s dividend is $2.08 per share.  Being a dividend aristocrat, T’s dividend will go up in 2022, and we should expect it to increase every year thereafter.

Of course, T’s fortune could change at any time.  Life is full of surprises, and there are no certainties, except for taxes and death.  Anyway, each person must weigh risks using his or her own judgment.  I am very confident in T, but you don’t have to be.

T’s Stock Price could Drop when this Bubble Pops!

It could.  However, if you fully understand yield, your response might likely be, “So what?”  If you don’t get what I say in the remainder of this section, go back and read the previous section again.

As stated above, in order to maintain its noble title of aristocrat, T will pay $2.08 per share this year.  It will pay more than that next year.  In 2023, it will pay even more.  That’s what it means to be a dividend aristocrat.

If T’s stock falls from $28.63 down to $20.00 next year, will the dividend be reduced or possibly eliminated?  Nope!  T is on the elite list.  It will suspend or reduce dividends only over its dead body.  It will borrow to pay dividends if it has to.  The only way that dividends will be reduced is if T is on its deathbed.  If it doesn’t raise dividends, it will be off the Dividend Aristocrat list for at least the next 25 years!  Suffice it to say that being a dividend aristocrat is a very elite status which none of the few honorees wants to lose.  They must continuously raise dividends every year to stay on this honor roll.

However, if at anytime you see signs that T is going to go on life support, you are always free to sell your T stock and cash out.  Or perhaps future Fed policy lands us back in the good, old days where borrowers were paying 11% to buy a car.  Then, and only then, might you be thinking T’s measly 7.3% isn’t cutting it anymore.  Then, and only then, might you want to seriously consider going back into CD’s.  Until then, we remain way down here at the interest rate bottom and with no growth in sight.

More importantly, until those 11% interest rates return, investors can look to T as a hedge against the stock market, just like CD’s used to be a common hedge against the stock market.  It’s a great irony because T is, indeed, a stock.  But you are not hedging against dividends (annuities), you are hedging against a decline in stock prices.  T is a dividend stock, not a growth stock.

Here’s how it works:  You buy T today for $28.63.  You get $2.08 in dividend this year.  That’s 7.265%.  Let’s say you get $2.10 next year.  That’s 7.334%.  So, actually, your yield will increase as the years pass.  That’s even better than being fixed and stagnate.  A little growth to help cover for inflation.  I don’t recall CD’s ever doing that.

Let’s say in 2026, T stock is going for $32.00 per share and is paying $2.14 in dividend.  Then, the stock market crashes.  Suppose T’s stock price drops to $25.00 – that’s even less than the $28.63 you paid in 2021.  5 years of stock growth was just wiped out.  The value went down to $25.00.  You’re thinking, “I’ve lost $3.63 per share.  How awful!”

Nope!  Not awful.  You don’t “lose” unless you sell the stock.  As long as you hold the stock, you will get your 2026 dividend of $2.14, and in 2027, you will get even more in dividend.

Let’s say in 2027, you get $2.15 in dividend.  That’s $2.15 on the original $28.63 you paid.  $7.509%!  What a solid source of income!  The stock market is down 30%, and everyone is trying to play catch-up.  Meanwhile, you just keep right on rocking.  “The check is in the mail, and it keeps getting bigger every year!”

In summary, when you buy a share of T stock, your minimum yield on that investment is fixed for life at the moment of purchase, unless something catastrophic happens later.

Of course, the converse is true, too.  If the stock price rises to $35.00, your yield will not go up any faster.  You will get the same $2.14 in 2026, whether the stock is at $25.00 or $35.00.  You can sell the stock and reap the profit, but you will have to give up your 7.3% yield to do it (since you will no longer receive T dividends).

If you buy more T later, the money you invest in those new shares will have a different yield.  If you buy T for $33.00 at any point in the future, your yield on those shares will be only 6.3%. 

Naturally, some of you might be thinking, “Now is the time to get in and secure my yield before the stock price rises.”  This is 100% true.  Conversely, if T’s price falls, its yield will rise.  If T goes to $25.00 in late 2021, you can get some shares with a yield of 8.3%, which will rise gradually over the years.  Nice!  

T’s Stock Price should be Less Volatile than the Rest of the Market

Let’s say you buy T today for $28.63, and the entire market crashes, falling 30% the following week.  How rotten can your luck be, right?

Will it be likely that T’s price will also drop 30%?

No.  If T drops 30% from $28.63 to $20.04, the yield on new purchases will be $2.08 / $20.00 = 10.4%!

10.4%!   That would be a heckuva, heckuva yield.  Can you imagine a CD paying 10.4%+ for life?  OMG!!!  Tell all your friends!

A large segment of the investing public is seeking stable returns.  As people age, they tend to become more risk averse and want to get away from risky stocks.  They need a predictable source of income.

However, don’t let risk aversion imply in any way that risk averse investors are any less greedy than anyone else.  If a risk averse investor can find a way to fix a 50% return, he’ll eagerly sign up for it.  CD’s suck right now!

So what does this mean?  It means that as the market crashes, people will be looking for the best stable returns they can find.  The party’s over.  Now, they will run to cash, to gold, to real estate, etc.  Many will also run to safer stocks, like T, where they can count on a strong yield while everyone waits for the market to recover (whenever that might happen).  Sitting in cash will hardly earn you a nickel, but T will earn you 7.3%, no matter what its stock price is.

When a lot of people want to buy T, the price goes up, not down.  When everything is crashing around you, a 7.3% yield starts to look good really fast.  In fact, people fleeing to safer stocks will want to get to them as quickly as possible.  “Get in at 7.3% before the price goes up and the yield falls!”

For this reason (which I hope I stated clearly), T’s stock will resist  a market collapse.  Is T immune from a crash?  I won’t go so far as to suggest it is immune, but you can certainly see why its price will tend to be more stable (and even possibly rise) as the market crashes.

It is possible that in times of panic, T’s stock will fall because untrained shareholders don’t understand everything I’ve covered above.  They will just panic and tell their investment advisors, “Cash it all out!  Everything!  Out!”

No!  Don’t do that!  Why would you give up your fixed 7.3% yield when the market crashes?  That’s the dumbest move you can make.  Nevertheless, there could be plenty of people who don’t understand these concepts and who simply panic and throw out the baby with the bath water.

If panic forces T stock substantially lower, you now know what this means.  It’s a bargain shopper’s paradise!

If the public is really dumb enough to force T’s price to $20.00 (yielding 10.4%), you need to be ready to buy if possible.  Hopefully, you have the cash to be able to do it.  Those new T shares at $20 will be a steal!

T’s Yield History / What this could Mean for Its Future Price

Word to the wise.  T’s yield could be in a bubble.

This article’s featured photo shows you T’s dividend yield graph since 2000.  You will see that it has always been between 5.2% and 7.3%.  Guess what?  It is 7.3% now, and it never has been this high before.

Check out T’s price graph, just above it’s yield graph.  If you study it, you will see that the price line and the yield line are almost mirror images.  Price goes up; yield goes down.  Price goes down; yield goes up.

The most perplexing thing about this is that T’s stock could be in a yield bubble while most other stocks are in a price bubble.

T’s yield is at an all-time high, but T’s price is nowhere near its record.  Why is that?  Well, for one thing, the DJIA, S&P 500 and NASDAQ have been on fire the last few years.  These people are in the big game, making 15%, 30% and 200% per year.  This is why many people fear that we’re in a bubble!

Think back through everything you’ve just read and answer this:  What must happen for T’s yield to fall from its current high of 7.3%?

Naturally, it’s price must rise – not fall.  If you feel that T’s record-setting yield must fall sooner or later, the value of your T shares must go up.  That’s a really, really good thing for people who already have lots of T and don’t need to, or can’t, buy any more of it.  It’s especially good if these people have to sell some shares to pay some bills, buy a new car, etc.  It’s always better to cash out when prices are high and yields are low.

On the other hand, record-high yields can be strong incentives for people to get in before they fall.  Suppose T’s yield heads back to the middle of its historical range of 5.2% – 7.3%.  Based on its current $2.08 dividend, T’s price would have to rise to $34.67 ($2.08 / .06) in order to yield 6%.  That’s a 21% gain in price to the person who buys T today!

Knowing that the dividend will be higher in a few years, let’s say the retreat to a 6% yield finishes a few years from now, when its dividend is say, $2.13.  The price at that time would be $2.13 / .06 = $35.50.  That’s a 24% gain in stock price.

For the person who waited and didn’t buy T today, he missed a chance to get in at 76% of the then-current price.

People who feel bearish on the market (fearing a bubble) are leaving their money in stocks because they think CD’s are the only alternative.  They think the choice is between  insanely high yields and insanely low yields.  As shown, reasonable returns are there for the taking in good dividend stocks.

T appears to be a really great deal for a solid, dependable return.  At a 7.3% yield, it looks to be the best deal it’s ever been and a fantastic hedge against a future market collapse.

The Yield-Growth is a Bonus

In T’s yield history, you will see that the chart in the middle is the dividend pay-out chart.  Let’s now see what life would be like today for a person who bought T in 2000.

First, he bought the stock for about $15.36 per share.  It’s dividend at that time was $0.36.  This provides a yield of $.036/$15.36 = 2.34%.  Not too appealing.

Fast-forward to today, and each share of T is now paying $2.08 in dividend.  Remember, the original investment in the share was only $15.36.  What kind of return is $2.08 giving him on his original investment?  It’s $2.08/$15.36 = 13.54%!  Now you know why many families keep T stock in the family and pass it down with instructions to their kids never to sell it.

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It’s Easy to Save Your Home from Medicaid

An applicant must have limited assets to be eligible for Medicaid. In most cases, owning a home will not disqualify the applicant.  In order to keep the home in the family and not lose equity in it to the state of Texas upon the Medicaid recipient’s death, a Transfer on Death deed will be required.

Medicaid’s 5-Year Lookback Rule

When applying for Medicaid, applicants must disclose all transfers of assets made within the previous 5 years. The purpose of this rule is to disqualify applicants who give away all their wealth in order to impoverish themselves to become Medicaid eligible.   

In short, making a gift of the home (and any other assets) might keep the property in the family, but it can disqualify the donor from receiving Medicaid.

Medicaid Reimbursement

In Texas, Medicaid recipients must reimburse the state of Texas out of their estates when they die.  If the recipient’s home passes through his estate, it will be subject to the state’s claim for reimbursement. 

Section 373.203(a) of Title 1 of the Texas Administrative Code expressly limits Medicaid reimbursement to estates as follows:

The Medicaid Estate Recovery Program (MERP) may file or present a: Class 7 probate claim under §298, Claims Against Estates of Decedents, Texas Probate Code, against the estate of deceased Medicaid recipients in accordance with the priorities contained in §322, Classification of Claims against Estates of Decedents, Texas Probate Code.

Notably, if the home is not part of the recipient’s estate when he dies, it will not be subject to reimbursement.  To avoid the home being part of his estate, the recipient can make a gift of it, but as stated above, it can result in ineligibility for Medicaid.

In any event, now it is clear that the task at hand is to save the equity in the home by insuring it passes to family members outside of the Medicaid recipients estate and in a manner that will not disqualify him from receiving Medicaid or other public benefits.

This can be done via a non-probate transfer.

Probate vs. Non-probate Transfers

When a person dies, his estate will consist of all assets owned at the time of death, except assets which are transferred outside of the person’s estate.

For example, life insurance which is payable to a beneficiary upon the insured’s death passes outside of the insured’s estate. Likewise, bank accounts set up as “pay on death” (POD) accounts to named beneficiaries also pass outside of the account-holder’s estate.

These types of transfers are known as “non-probate transfers.”  There are many other types of non-probate transfers, and this article does not attempt to list all of them.  The main purpose is to make a simple distinction between probate and non-probate transfers.  Probate transfers are all transfers of property which occur upon the death of the owner, except for non-probate transfers.  Probate transfers occur through the decedent’s estate, and as stated above, such property will be subject to the state’s claim for reimbursement.

The key takeaway is that property which passes upon death by way of a non-probate transfer is not considered to be property of the decedent’s estate. 

Ladybird Deed

A type of deed called a “Ladybird deed” is one way in which Medicaid recipients try to keep their homes out of their estates.  Ladybird deeds are widely used, but this does not mean they are without controversy.

On the one hand, the applicant does not want to become ineligible for having made a gift during the lookback period. On the other hand, the Ladybird deed often reserves a right of the applicant to sell or mortgage the property and keep the proceeds. This hardly sounds like anything was transferred at all – meaning it could cause inclusion of the home within the applicant’s probate estate.

Suffice it to say, the Ladybird Deed is a clever device, but there has been some degree of uncertainty as to their effectiveness.

Texas’ Solution: the Transfer on Death Deed

Chapter 114 of the Texas Estates Code was created to alleviate these concerns .  It enables families to preserve their home equity by using a Transfer on Death (TOD) deed.

By giving a TOD deed, the Medicaid recipient retains all rights of ownership during his lifetime. He can sell the property. He can mortgage the property. He continues to receive all benefits of home ownership protections and property tax exemptions.  He can even revoke the TOD deed.

Section 114.101 states:

During a transferor’s life, a transfer on death deed does not:

(1) affect an interest or right of the transferor or any other owner, including:

(A) the right to transfer or encumber the real property that is the subject of the deed;

(B) homestead rights in the real property, if applicable; and

(C) ad valorem tax exemptions, including exemptions for residence homestead, persons 65 years of age or older, persons with disabilities, and veterans;

(2) affect an interest or right of a transferee of the real property that is the subject of the deed, even if the transferee has actual or constructive notice of the deed;

(3) affect an interest or right of a secured or unsecured creditor or future creditor of the transferor, even if the creditor has actual or constructive notice of the deed;

(4) affect the transferor’s or designated beneficiary’s eligibility for any form of public assistance, subject to applicable federal law;

(5) constitute a transfer triggering a “due on sale” or similar clause;

(6) invoke statutory real estate notice or disclosure requirements;

(7) create a legal or equitable interest in favor of the designated beneficiary; or

(8) subject the real property to claims or process of a creditor of the designated beneficiary.

Notice that Section 114.101(4) expressly states a TOD deed will not affect the transferor’s eligibility for public benefits.  

Section 114.106(b) makes clear that the property will not be considered as part of the recipient’s estate.  It states:

… real property transferred at the transferor’s death by a transfer on death deed is not considered property of the probate estate for any purpose, including for purposes of Section 531.077, Government Code.

Section 531.077 of the Texas Government Code is the statute which provides that the state of Texas will seek Medicaid reimbursement from the estates of decedents.  It states:

Sec. 531.077. RECOVERY OF CERTAIN ASSISTANCE. (a) The executive commissioner shall ensure that Medicaid implements 42 U.S.C. Section 1396p(b)(1).

(b) The Medicaid account is an account in the general revenue fund. Any funds recovered by implementing 42 U.S.C. Section 1396p(b)(1) shall be deposited in the Medicaid account. Money in the account may be appropriated only to fund long-term care, including community-based care and facility-based care.

As stated at the beginning of this article, Section 373.203(a) of Title 1 of the Texas Administrative Code is the rule which limits reimbursement to the recipient’s estate.   As long as the property is not considered to be a part of the recipient’s estate, it will pass free from the state’s reimbursement claims.

In conclusion, every homeowner who receives Medicaid benefits should execute and file a Transfer on Death deed in order to preserve the home’s equity for his or her beneficiaries.

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Can You Trust Your Trust… to Save You Taxes?

There are good reasons why you might want to leave part of your estate in trust. Maybe an intended beneficiary is not a good money manager and will blow through your estate if given the chance. Trusts can be used to limit his or her access to trust assets and income.

Trusts can do even more than that. Similar to the corporate form of doing business, trusts can protect assets from the creditors of your beneficiaries.

In addition, trusts can be used to provide for a series of generations, such as to your children for their lives and then, to your grandchildren. This type of design can have the effect of keeping property “in the family” as opposed to winding its way through the in-laws’ families after a generation or two.

There are many other reasons why trusts might be appropriate, but they are not necessarily well-suited to income and estate tax avoidance. This article will explore some basic tax issues which are in play.

History of the Federal Estate Tax Exemption

Check out this chart showing how the federal estate tax exemption amount has risen since 1997:

In just 23 years, the exemption increased from $600,000 to almost $12 million! Not even the stock markets have boomed like this. Moreover, there hasn’t been a down year yet – not even in 2009-2011 when Democrats held the White House and both chambers of Congress.

This massive acceleration in the federal estate tax exemption has changed the tax planning paradigm completely. Think about all those people who made estate plans back in 2008 and earlier. Many of those outdated plans have not only become obsolete, but they are actually tax traps that can easily cost a person hundreds of thousands of dollars, if not millions. Keep reading, and it will become very obvious why this is the case.

Let’s examine a typical trust plan.

Assume Ted Testator has a taxable estate. He wishes to leave all of his estate to his only child, Charles, who in turn will leave his estate to his children (Ted’s grandchildren).

Ted’s estate will be taxed upon his death. If Ted leaves everything to Charles, the same property will be taxed again upon Charles’ death (assuming Charles will also have a taxable estate).

Generation Skipping

To avoid taxing the property twice, Ted can leave everything directly to his grandchildren. This is called “generation skipping.” The IRS is aware of this strategy, and the tax laws permit it to a limited extent. Generation skipping transfer taxes are beyond the scope of this article, but the simple generation skipping plan described above easily makes the point that double taxation can be avoided.

Let’s say Ted does not want to bypass Charles completely. Trusts can be used to skip Charles without really skipping Charles. A typical trust plan for Ted will leave everything in trust, naming Charles as an income beneficiary for life, and distributing the property to the grandchildren outright after Charles dies. Charles is also named as the trustee, and he is permitted to pay trust principle to himself for his health, education, maintenance, and support (HEMS).

For all practical purposes, this type of trust gives Charles virtually complete control over the trust property. It’s like he owns it… but he doesn’t! It’s not part of his estate when he dies, and no estate tax will apply. Mission accomplished… or not?

This is where it gets slippery.

No Step-Up in Basis

While estate tax avoidance is accomplished, Charles does not own the property. It is in trust. This means, the property will not receive a step-up in basis when Charles dies. Basis is an important tax consideration not to be overlooked.

The basis of an asset is often its acquisition price. For example, if Ted purchased unimproved land in 1980 for $1 million and did not make improvements on it, its basis in 2020 is still $1 million – the price paid. If Ted sells the property for $7 million in 2020, there is a $6 million capital gain, and he will have to write a hefty check to Uncle Sam. This is income tax, not estate tax.

Instead of selling the property in 2020, assume Ted dies, and it goes into trust as mentioned above. As a result of his death, the property’s basis will be stepped-up to its fair market value at the time of Ted’s death (i.e., $7 million). If Charles, as the trustee of the trust, sells the property for $7 million, there will be no capital gain. That’s a lot of income tax saved. You can read more about the importance of a step-up in basis here.

So far, so good…

But What about when Charles Dies?

Suppose Charles dies in 2050, when the property – having been put into trust for his benefit – has greatly appreciated and is then worth $20 million. Since he was not the owner upon his death, the property will not receive a step-up. The basis remains at $7 million – the fair market value upon Ted’s death back in 2020. If the grandchildren sell the property after Charles’ death for $20 million in 2050, they will pay a large sum in taxes on their $13 million capital gain.

If Ted would have left the property outright to Charles, rather than in trust, the grandchildren would have enjoyed a step-up in basis upon Charles’ death. They could then sell the property for $20 million without incurring any capital gain tax liability.

But Charles’ Estate will Incur Estate Tax if He Owns the Property upon His Death!

Who says? Although there is plenty of talk about how Congress or the next President is going to stick it the rich, history indicates this is somewhat unlikely.

Who knows what the estate tax exemption amount will be in 2050? It has risen from $600,000 in 1997 to over $11 million in 2018. Perhaps it could be $30-40 million by 2050. It might even be repealed.

The takeaway here is that when property will significantly appreciate over time, the step-up in basis upon death is very valuable and not to be overlooked. Given the way the estate tax exemption has been growing over the last two decades, it is possible that both estate taxes and capital gains taxes can be avoided. The trust, in our example, failed to accomplish that result since it forfeited the step-up in an effort to avoid estate taxes via generation-skipping. In essence, the skip – which was supposed to save the grandchildren millions of dollars – actually cost the grandchildren millions of dollars.

What about 2025?

In 2025, the current $11.58 million estate tax exemption amount is slated to expire. This means that unless Congress takes action to maintain or increase it, it will automatically revert to $5 million (adjusted for inflation) at the end of 2025. This sort of scenario can make people nervous.

For example, if Ted’s estate is currently valued at $8 million, no tax would be due if he dies prior to the end of 2025. If he dies in 2025, his estate will be subject to estate taxes unless Congress does something.

There are two things to note about this situation.

First, it happened before, in 2012. At that time, the exemption was $5 million, and it was going to revert to $1 million at the end of 2012. Congress did not take action as quickly as people had hoped, and in a last-minute frenzy, many wealthy people started gifting away property. Then, on January 1, 2013, before anyone had a chance to die that year, Congress passed the American Taxpayer Relief Act which extended the $5 million exemption amount.

Admittedly, hindsight is 20/20, but much of that gifting frenzy was for naught. Even worse, all those gifts transferred the owners’ basis to the donees. In essence, the step-up in basis was lost and there was no estate tax savings to be derived from the gifts. That’s a double-whammy for calling it wrong!

Another important point to note is that by leaving estate property to Charles outright, rather than in a generation-skipping trust, he will at least have the option to (i) retain it until death for the step-up in basis, or (ii) forego the step-up and gift it to avoid estate taxes on his death. Being able to make the right call at the closest point in time has massive advantages. Charles is much more likely to know the tax landscape in 2050 than is Ted. Unless there is a really good reason, Ted has no business trying to guess what the tax landscape will be 30 – 40 years down the road.

The generation-skipping trust in our example takes away Charles’ option to keep or gift the property. If the property is in trust, there will be no opportunity to receive a step-up in basis, regardless of what the estate tax and income tax landscape looks like in 2050. As has been shown, planning too rigidly too soon can be a very costly mistake.

This is not to say that all trusts are bad. As stated above, there are many good reasons to leave property in a trust. It is also possible to structure trusts in a manner to include property in a beneficiary’s estate. If the trust in our example gave Charles a testamentary general power of appointment over the trust property upon his death, then the property would be included in his estate and it would receive a step-up in basis, while protecting the property from his creditors during his lifetime.

A testamentary general power of appointment is the power to give the property upon death (typically by a will provision) to one’s estate or the creditors of one’s estate (among anyone else). The following is an example: “… in trust, naming Charles as an income beneficiary for life, and distributing the property upon his death to such persons as he shall designate in his last will and testament, provided that such persons may include only my grandchildren and the creditors of Charles’ estate.” (By not allowing Charles to appoint the property to his estate, this language prevents Charles from leaving the property to his spouse and keeps the property “in the family,” as described earlier.)

Again, however, an outright gift of the property to Charles would give him the option of keeping it in his estate to receive a step-up, or gifting it to avoid estate taxes. Sometimes, clients need this flexibility; sometimes, they don’t.

Conclusion

There is no crystal ball when it comes to planning for estate and income taxes. All we have to go on is a track record and the current state of politics. Looking at the chart above, the track record indicates that we should expect the exemption amount to rise substantially over the coming years – maybe even be repealed.

This article demonstrated how old and outdated tax planning strategies can do tremendously more harm than good. Trusts can be very useful, but they can also be very dangerous. Don’t just trust your trust to save you taxes. Verify it.

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Oral and Implied Contracts

The general rule is that oral contracts are enforceable. However, contracts involving certain types of transactions must be in writing. The legal profession often refers to this requirement as the “Statute of Frauds.” The name derives from the purpose of the rule, which is to prevent people from fabricating agreements to perpetrate a fraud (e.g., “A claims B orally agreed to sell his farm to A for $1,000 since A took care of B’s mom in her old age.”)

Section 26.01 of the Texas Business & Commerce Code states:

PROMISE OR AGREEMENT MUST BE IN WRITING. (a) A promise or agreement described in Subsection (b) of this section is not enforceable unless the promise or agreement, or a memorandum of it, is

(1) in writing; and

(2) signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him.

(b) Subsection (a) of this section applies to:

(1) a promise by an executor or administrator to answer out of his own estate for any debt or damage due from his testator or intestate;

(2) a promise by one person to answer for the debt, default, or miscarriage of another person;

(3) an agreement made on consideration of marriage or on consideration of nonmarital conjugal cohabitation;

(4) a contract for the sale of real estate;

(5) a lease of real estate for a term longer than one year;

(6) an agreement which is not to be performed within one year from the date of making the agreement;

(7) a promise or agreement to pay a commission for the sale or purchase of:

(A) an oil or gas mining lease;

(B) an oil or gas royalty;

(C) minerals; or

(D) a mineral interest; and

(8) an agreement, promise, contract, or warranty of cure relating to medical care or results thereof made by a physician or health care provider as defined in Section 74.001, Civil Practice and Remedies Code. This section shall not apply to pharmacists.

In addition, Section 26.02 of the Texas Business & Commerce Code requires certain types of loan agreements to be in writing.

Exceptions to Statute of Frauds

Sometimes, transactions which seem to squarely fall within the statute of frauds will still be enforced.  There are a number of exceptions.

For example, partial performance is an exception to the statute.  In the case of Bookout, an oral agreement to purchase a chiropractic clinic was enforceable because the buyer actually took possession, operated the clinic and made payments to the seller.

There are other exceptions to the statute of frauds, and they can become quite complicated.  It is best to consult an attorney when confronted with contract disputes because non-attorneys will typically have no idea where to begin.

Implied Contracts

What is an “implied” contract?  Well… whatever it is, it is not a contract.

Sometimes, people do not have a contract, but their conduct leads courts and juries to imply a contract.  This legal doctrine is often referred to as quantum meruit.

In the case of Kam, the court stated:

The elements of a quantum meruit claim require proof that:

1) valuable services were rendered or materials furnished; 2) for the person sought to be charged; 3) which services and materials were accepted by the person sought to be charged, used and enjoyed by him; 4) under such circumstances as reasonably notified the person sought to be charged that the plaintiff in performing such services was expecting to be paid by the person sought to be charged.

A classic example where quantum meruit would imply a contract is where A hires a painting company.  The crew shows up at B’s house by mistake, and B lets them in and watches them paint his house.  After allowing the crew to paint his house, it would be unfair for B to refuse payment.

Lesson

With some exceptions, oral contracts are enforceable, and even when there is no contract, the doctrine of quantum meruit can imply a contract to pay for goods or services.

Still, it is best to reduce agreements to writing and to require signatures of the persons who are expected to comply with them.