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Additional Methods to Move Assets Beyond Executor’s Reach

Last week, BJ asked about distribution of assets in a second marriage. His second wife had died with a Will leaving “everything” to her children from the first marriage. He wanted to know what assets were included in his wife’s probate estate, and what limits there were on the Executor’s reach into assets like joint bank accounts.

Last week’s column was limited to identifying the variety of assets that are considered non-testamentary. The Executor of his wife’s estate was entitled to ask for proof why certain assets, like a bank account with a “pay on death” designation, should not be turned over to the decedent’s estate. I wanted to expand my answer to encompass other options that BJ should consider.

For instance, BJ and his wife could have simplified the entire process with some additional pre-planning. Specifically, they could have entered into a prenuptial agreement. If they didn’t think of that before marriage, they could have entered into a marital property partition agreement at any time during their marriage. Both are legally binding methods to identify which assets are community property and which are separate property.

Additionally, either agreement could avoid the silent creation of community property. Let’s say that BJ had a $100,000 CD as his separate property before the marriage. He kept the CD in his name only. Each year, the bank paid him interest – so after 10 years, the CD was valued at about $130,000. Even though the underlying $100,000 is separate property, under Texas law the $30,000 interest earned (because it was earned during a marriage) is community property. So when his wife dies and her Executor asks about assets, BJ must give the Executor ½ of that growth, or $15,000.

With a valid prenuptial or partition agreement, the spouses could have eliminated that silent creation of community property. The growth on BJ’s CD would remain his separate property, and the growth on his wife’s separate property would all remain her separate property. This would help avoid an encroachment on their privacy by the other’s Executor. What is his remains his, and what is hers remains hers.

For even more protection, once the prenuptial or partition agreement is in place, each spouse could create their own living trust agreement. Each spouse would transfer his or her separate assets into his or her separate trust, with separate names, separate management and separate beneficiaries. When one spouse dies, there would be no need for a probate and no appointment of an Executor. There would be no awkward questions to the surviving spouse from the deceased spouse’s children or Executor.

The decedent’s assets would all be non-testamentary, and would be entirely separate and not intermingled with the surviving spouse’s assets. The Trustee of the deceased spouse’s trust would access only the assets held in the deceased spouse’s trust, and would have no reason to inquire into the contents of the surviving spouse’s separate trust.

There is one asset that would need special attention in order for this separation method to work properly: the marital homestead. Under Texas law, the surviving spouse has a legally guaranteed right to occupy the marital homestead. It does not matter if the house belonged solely to the deceased spouse as separate property. It does not matter if the deceased spouse left the house, in a Will or a Trust, to her children from the first marriage. The surviving spouse can reside in the house for life. But with special attention in a marital property agreement, the spouses can agree that the legal homestead occupancy right is waived. A knowledgeable attorney can be of great assistance in preserving and protecting an estate, but you must consult and take action while both spouses are alive and are competent.

Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2012) practicing estate planning and probate law in San Antonio.

Original Publication: San Antonio Express News, May 13, 2013


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