I. DO I NEED A WILL IN LOUISIANA?
Absolutely! If you die without a Will or with an invalid Will, Louisiana law determines who inherits your property. This Louisiana law was written before the invention of the automobile, the airplane and federal and state death taxes. It rarely meets your family and financial objectives.
II. WHAT HAPPENS IF I DIE WITHOUT A WILL OR WITH AN INVALID WILL?
If you have a spouse and children, your children inherit your one-half interest in all community property acquired during your marriage and all of your separate property (such as property acquired prior to marriage or inherited property). Your spouse has the right to possess, use and receive income (“usufruct”) from the community property inherited by your children. However, this usufruct terminates if the surviving spouse remarries. The usufruct does not apply to any separate property inherited by your children.
If you have a spouse and no children (or grandchildren), your spouse inherits your community property, but your separate property will be distributed to your brothers and sisters (or their descendants), with a usufruct in favor of your surviving parent(s). At your spouse’s death, any remaining community property will be distributed under the terms of your spouse’s Will or solely to your spouse’s side of the family if your spouse has no Will.
If you have no spouse but have children, your estate will be divided equally among your children, regardless of their individual financial condition or ability. If you have no spouse or descendants, your estate will be divided equally by brothers and sisters, if any, surviving parents or your other nearest relatives.
III. DOESN’T LOUISIANA LIMIT WHAT I CAN DO IN A WILL?
Yes. If you die with children under age 24 or severely handicapped children, they are your “forced heirs” and can demand a portion (“forced portion”) of your estate. This applies even to children of a prior marriage. The forced portion is one-quarter (1/4) for one forced heir and one-half (½) for two or more forced heirs divided equally by the number of forced heirs, but in no event is the forced heir’s fraction more than the fraction the forced heir would have been entitled to if you died without a Will. There is no limit on what you can leave to others, including your spouse, if you have no children or if your children are age 24 or over and none are handicapped.
IV. WHAT ARE THE BENEFITS OF A WILL?
There are numerous benefits of a properly drafted Will.
• Give some or all of the disposable portion of your estate to your spouse, grandchildren or other family members or friends.
• Make special bequests of the family home, jewelry, collections or personal property to your spouse or children.
• Protect your spouse with a usufruct for life over both separate and community property.
• Establish trusts for children, grandchildren or other beneficiaries who need protection or experienced management of funds.
• Provide for “special” children to insure their inheritance will not jeopardize their eligibility for governmental assistance programs.
• Provide for contingency bequests in the case of a common disaster.
• Provide for the disposition of the family business.
• Make bequests to charitable organizations.
• Conserve your estate for your heirs by proper tax planning.
V. MY ESTATE IS MODEST. DO I NEED A WILL?
Yes. Even if your estate consists only of your family home, some savings and perhaps some life insurance, a Will can be very important for family planning purposes. You can give your spouse complete control over the family home and other assets after your death. If you are married but have no children, a properly drafted Will can avoid shifting of assets solely to the survivor’s side of the family at the survivor’s subsequent death. Finally, there may be some special items you wish to leave to particular persons or charities.
VI. CAN I PREPARE MY OWN WILL?
There is too much at stake to “do it yourself.” Many books on the market suggest you can prepare your own Will or avoid probate. However, because of the peculiarities of Louisiana law, reliance on pre-printed forms is risky. Most of the litigation involving estates is caused from problems arising from a “homemade” Will. You should consult with a lawyer familiar with Wills and trusts. The lawyer will analyze your family and tax objectives, recommend alternatives and prepare a Will binding on your heirs which accomplishes your objectives.
VII. WHAT HAPPENS IF I DIE WITH A WILL?
Your Will is presented to the appropriate court in order to validate it as your Will. This process is known as “probate.” The term “probate” is also used in the larger sense of “probating your estate.” If your estate is not complex and requires no formal administration, the beneficiaries named in your Will are put into possession of their inheritance after payment of all death taxes, if any. If your estate requires an administration, probating your estate means the process by which the person designated in your Will as your Executor handles your estate’s affairs, including gathering and valuing your assets, paying your debts, taxes and expenses of administration and distributing your assets to those designated as beneficiaries in your Will, all under the supervision of the Court. Your Executor is required by law to conclude the administration of your succession as soon as possible. Fortunately, Louisiana permits independent administration of most estates, particularly those where a properly drafted Will is involved, thereby reducing much of the cost and delays of probate.
Life insurance death benefits and retirement plan death benefits (including IRAs) payable to named beneficiaries (other than your estate) do not form part of your probate estate and are not governed by the terms of your Will. These benefits are paid directly upon proof of death to those persons you have named on beneficiary designation forms.
VIII. WHAT IS A “LIVING WILL”?
A “Living Will” is a written declaration which allows you to state in advance your wishes regarding the use of artificial life-prolonging medical care if you become terminally ill and unable to communicate. The Living Will must be witnessed by two persons other than a member of your family or physician. You should furnish a copy to your doctor to be made part of your medical records. Your Living Will avoids the emotional trauma of leaving the decision to a loved one. Instead, you preserve your own decision making autonomy.
IX. WHAT IS A DURABLE POWER OF ATTORNEY?
Simply put, a power of attorney is a written legal authorization for someone to act on your behalf for whatever purposes you desire. It can be a limited power to do only specific acts (such as handling a bank account or selling particular real estate), or a general power to handle all of your financial affairs. A “durable” power means that the power of attorney continues to operate even if you should become incapacitated or incompetent. The power of attorney can be effective upon signing or only at such time as you may become incompetent.
The advantage of a durable power of attorney is that you appoint someone you want to manage any part or all of your affairs rather than a court.
A power of attorney can include a medical power of attorney as well. Unlike the Living Will which deals with the use of artificial life support only if you are terminally ill and does not delegate decision making to someone else, the medical power permits someone you choose to make any or all other health care decisions for you if you become incompetent.
X. I RECENTLY READ ABOUT A “LIVING TRUST.” WHAT ARE THE ADVANTAGES AND DISADVANTAGES?
A “living trust” is a legal arrangement you execute while living under which a person or bank (called the “Trustee”) holds title to property for the benefit of other persons (called “Beneficiaries”). A common variety of living trust is the revocable living trust whereby you name yourself Trustee and Beneficiary and re-register title to all or part of your assets in the name of the trust. You can designate a successor Trustee who will manage the trust assets if you become incompetent. The trust has a high level of acceptance in the business and financial community and therefore does not have the problem of acceptance by third parties sometimes encountered with a Power of Attorney.
The trust can direct the Trustee to distribute the assets to your designated beneficiaries at your death. This avoids any delays of probate. However, immediate distribution of your estate can cause serious problems, such as a lack of funds to pay your funeral expenses, hospital bills and other creditors, as well as any death taxes which may be due. There are no special tax benefits under a living trust which you cannot obtain under a properly drafted Will. Other disadvantages include the legal costs to establish the trust, recordation fees if the trust contains real estate, annual federal and state tax returns and the administrative burdens of changing the title to your assets. Even if you have a living trust, a succession proceeding may be necessary with respect to any of your assets which were not registered in the name of the trust and to establish the existence or nonexistence of forced heirs for title purposes if you own real estate or mineral interests. Unlike many other states, the Louisiana probate process is efficient and can be speedy so that probate avoidance techniques may not be necessary or desirable.
XI. WHAT TAXES WILL BE DUE AT MY DEATH?
The Louisiana state inheritance tax has been repealed for decedents dying after June 30, 2004.
The federal estate tax will not be applicable to most estates. The Tax Cuts and Jobs Act now provides that estates of decedents dying during the calendar years 2018 through 2025 are entitled to a $10,000,000 exemption (indexed for inflation, currently $11,400,000), which equates to $20,000,000 ($22,800,000 with the inflation index) of community property exempt from the tax. The marginal estate tax rate is 40%. The $5 Million exemption will return for deaths occurring in 2026 and thereafter unless Congress votes to extend the larger exemption.
Tax planning for most estates has now shifted to income tax planning through the preservation of the income tax basis adjustment to fair market value at death.
XII. CAN CHARITABLE GIVING FIT INTO MY ESTATE PLAN?
Absolutely! In addition to humanitarian and moral principles, charitable giving often is motivated by tax considerations. For over half a century, the tax laws have favored charitable contributions by individuals, the major source of charitable giving. Lifetime gifts to charities can save federal and state income and gift taxes as well as death taxes. The charitable income tax deduction is subject to a number of statutory qualifications and limitations such as the type of property donated, the nature of the charitable organization and the income level of the donor. Bequests to charities in your Will can save death taxes.
XIII. WHAT IF I NEED THE INCOME FROM THE PROPERTY?
Many people who are philanthropic by nature simply cannot afford to make outright gifts of cash or other property in full ownership due to the high cost of living, inflation and the cost of supporting family, including spouses, children, grandchildren, parents and others. However, there are a number of deferred gift giving plans which permit you to make a sizable gift to charity without giving up the income from the assets.
XIV. WHAT ARE SOME TYPES OF DEFERRED GIVING PLANS?
Deferred giving includes the use of charitable remainder trusts, pooled income funds and charitable gift annuities.
In a charitable remainder trust, you irrevocably transfer money, stocks, bonds or other property to a trust which provides income to you (or to a survivor, such as your spouse) for a period of years or for life, after which the trust assets belong to the charity. The assets are managed and invested by a trustee. You will receive payments each year either in the form of a fixed percentage of the fair market value of the assets you donated to the trust or a fixed dollar amount. If you establish the trust during your lifetime, you are entitled to an immediate charitable income tax deduction equal to the present value of the charity’s future interest (subject to statutory limitations). This is calculated by multiplying the fair market value of the property you contribute to the trust by an actuarial factor set forth in IRS Treasury Tables which takes into consideration a number of factors including your age, the amount of the annual payment, the term of the trust and current interest rates.
There are a number of estate planning benefits of charitable trusts in addition to the income tax deduction:
• The income received each year may be treated as capital gain and taxed at a lower rate than ordinary income. Furthermore, part of the payment may be treated as a tax-free return of capital.
• There is no capital gain when you transfer appreciated property such as stock to a charitable remainder trust.
• The trust is tax-exempt. It is not subject to the capital gains tax. Thus, it can sell appreciated property without tax and reinvest 100% of the sale proceeds to generate the desired income level for you.
• The trust fund can be managed by a professional trustee.
• Charitable trusts can be established in your Will to save federal estate taxes, if your estate is large enough.
A pooled income fund is similar to a charitable remainder trust because you transfer money, stocks or bonds to a fund and receive income each year for life, after which the property belongs to a charity. It differs from a charitable trust since your donation is invested together with gifts by others to the fund. You share in the pooled income fund earnings which are taxable as ordinary income each year. A sizable charitable income tax deduction could apply, determined by IRS Treasury Tables which discount the gifts by the present value of the retained income interest. The discount factor depends upon your age and the pooled income fund’s earning experience in recent years. A pooled income fund is a way to transfer appreciated investments to a charity without paying the capital gains tax on the gain and to retain income from a diversified investment portfolio. Also, the fund pays no tax if it sells those appreciated investments if held long-term. Like a charitable trust, the pooled income fund can provide income for your life and for the life of a family member, such as your spouse, child, parent or anyone else.
A charitable gift annuity involves the transfer of money, stocks or bonds to a charity in exchange for a payment of a fixed amount annually to you (or a survivor), for life. No trust is involved. The transaction is treated as a part gift and a part purchase of an annuity. You make a charitable contribution equal to the value of the property transferred minus the cost of purchasing a comparable commercial annuity, determined by IRS tables. A portion of each annuity payment is tax free and a portion is capital gain during your life expectancy calculated in accordance with IRS tables. If you outlive your life expectancy, the payments are all ordinary income from that point forward. You can obtain an attractive rate of return with little or no investment worry. The capital gain portion of payments attributable to a charitable gift annuity funded with appreciated property is often smaller than if you sell the property first and donate it to the charity thereafter. Furthermore, the gain is not all reportable in the year of the gift as would be the case in a sale followed by a charitable contribution. Frequently, the tax savings attributable to the charitable deduction offset any capital gains resulting from the transfer.
XV. BUT WHAT IF I CAN’T PART WITH ANY PROPERTY NOW?
There are a number of deferred giving techniques which provide estate planning benefits even if you cannot part with your property now.
For example, you can donate your home or a farm to a charity now but retain the right to live in it for your lifetime and for the life of a survivor such as your spouse. You would be entitled to an income tax charitable contribution equal to the present value of the charity’s interest, which would depend upon age and life expectancies.
Furthermore, you can leave a gift to charity, including a charitable trust, in your Will. There is an unlimited federal estate tax deduction for the value of charitable bequests.
Often, donors with family members prefer to make contingent charitable bequests which would benefit a charity only if there are no surviving close family members. Alternatively, a husband and wife with no children could leave their entire estate to the survivor but if the spouse does not survive, the bequest would go to the charity.
Finally, a charity can be named as a beneficiary of all or a part of a life insurance policy or as a contingent beneficiary if the named beneficiary dies first. Naming a charity such as a beneficiary of a life insurance policy results in no income tax deduction (because you can always change the beneficiary) but the proceeds will be received by the charity free of estate and inheritance taxes. In this way, even donors of modest means can provide a sizable charitable bequest.
There are a variety of ways to accomplish a Louisiana resident’s estate planning goals, family and philanthropic objectives and save taxes.
Please note that this presentation is provided solely for the purpose of enhancing knowledge on legal matters. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your legal advisor. This presentation is for educational purposes only and is not intended, and should not be relied upon, as legal advice.
This presentation is © 2019 Baldwin Haspel Burke & Mayer