Frequently Asked Questions

A Bypass Trust is a trust designed to hold assets owned by the deceased spouse having a total value equal to (or not exceeding) the Tax Free Amount. The surviving spouse or any other qualified person or entity may serve as trustee of a correctly drafted Bypass Trust. Per the terms of the typical Bypass Trust, distributions can be made to the surviving spouse to provide for his or her health, support and maintenance in accordance with his or her accustomed standard of living. A Bypass Trust can be drafted to allow distributions to be made to children and other descendants as "secondary" beneficiaries while the surviving spouse is living. Those secondary beneficiaries are often in lower tax brackets than the trust itself and the surviving spouse. Thus, including a power to make distributions from the Bypass Trust to children and grandchildren sets up the possibility of trust income being taxed at very low rates. When trust income is distributed out of the trust to a permissible beneficiary, the beneficiary pays income tax on the distributed income, not the trust. The surviving spouse is sometimes given a testamentary "power of appointment" (described below) over the Bypass Trust. In spite of the fact that the surviving spouse has use of the Bypass Trust assets during his/her lifetime (and may be given control over the disposition of the Bypass Trust assets at death through a testamentary "limited" power of appointment), the assets in the Bypass Trust should not be included in the surviving spouse's estate upon his/her death. In this way, the Bypass Trust assets "bypass" estate taxes on both spouses' deaths. Note that the Bypass Trust assets avoid estate taxes on the death of the surviving spouse no matter what the trust assets are worth at that time (i.e., the value of the Bypass Trust can exceed the Tax Free Amount when the surviving spouse dies and still not incur estate taxes).

A Marital Trust is a trust designed to hold the Marital Deduction Amount, i.e., the portion of the deceased spouse's estate in excess of the "Tax Free Amount" (if any). The value of the assets passing to a Marital Trust is deducted from the taxable estate of the deceased spouse, effectively deferring estate taxes on the Marital Trust assets until the death of the surviving spouse. The surviving spouse or any other qualified person or entity may serve as trustee of a correctly drafted Marital Trust. Per federal tax law, all (net) income earned by the Marital Trust assets must be distributed to the surviving spouse each year. Distributions of principal can usually also be made to the surviving spouse from the Marital Trust to provide for his/her health, support and maintenance in accordance with his/her accustomed standard of living. Upon the death of the surviving spouse, the assets in the Marital Trust (on which estate tax was deferred when the first spouse died), as well as the surviving spouse's individually owned assets, will be included in the surviving spouse's estate and subject to estate taxes to the extent the total value exceeds the surviving spouse's Tax Free Amount.

As a result of the Tax Cuts and Jobs Act passed in December 2017, which increased the basic estate tax exclusion amount to $10 million, adjusted for inflation, for years 2018 through 2025, some married couples prefer to use a Marital Trust, rather than a Bypass Trust, for the entire amount owned by the deceased spouse (i.e., the first spouse to die). The primary reason to do that is to obtain a second "adjustment" to income tax basis for the assets held in the Marital Trust when the surviving spouse dies. If the assets have increased in value by the time of the surviving spouse's death, that adjustment will be a "step up" in basis. In view of the fact that the Marital Trust assets will be included in the surviving spouse's estate (unless the executor of the deceased spouse's estate elects otherwise), if it appears that one exemption from the federal estate tax will not be sufficient to avoid estate taxes on the surviving spouse's death, the executor of the deceased spouse's estate can file a federal estate tax return (Form 706) within nine months of the deceased spouse's death (or by the extended due date, if elected) and make the portability election. When the portability election is made, the deceased spouse's unused exemption amount, called the "DSUE Amount" (which is the full amount passing into the Marital Trust plus all amounts passing directly to the surviving spouse, assuming the surviving spouse is a US citizen), can be transported to the surviving spouse, which will result in the surviving spouse having more than just one exemption from the estate tax when the surviving spouse dies (i.e., his/her own exemption and the DSUE Amount of the deceased spouse that was transported to the surviving spouse by filing the Form 706 and making the portability election).

When deciding between a Marital Trust and outright gifts to the surviving spouse, there are both tax and non-tax reasons for choosing a Marital Trust. Like all irrevocable trusts, the Marital Trust can be designed to protect the assets from loss due to a divorce or other lawsuit, can provide for management of the trust assets in the event the surviving spouse loses his or her mental capacity or is not financially astute, and can protect the trust assets from being diverted to a new spouse of the surviving spouse or to other persons who the deceased spouse does not want to benefit. In addition, use of a Marital Trust can facilitate "second generation planning" (see below).

Most Wills created for individuals who own significant assets provide for "Descendant's Trusts" for children, grandchildren and other descendants. Some Wills include "Child's Trusts" for children only. Others include Child's Trusts for children and Descendant's Trusts for grandchildren and other descendants. Both trusts for children and trusts for grandchildren and other descendants can be called, "Descendant's Trusts." In any case, each child or other descendant is the named primary beneficiary of his/her own separate trust. The beneficiary's own children and other descendants are often included as additional (secondary) beneficiaries of the primary beneficiary's Descendant's Trust to whom distributions can be made while the primary beneficiary is living. This adds flexibility and increases the income tax options. When the primary beneficiary dies, the assets remaining in his/her Descendant's Trust will usually be distributed to new Descendant's Trusts for his/her children, but it is typical to give the primary beneficiary of a Descendant's Trust a testamentary power of appointment (see below).

In Wills without second generation planning, "Contingent Trusts" are used (see below). Contingent Trusts terminate when the beneficiary reaches the specified termination age (such as age 25). Until the Contingent Trust terminates, the trust protects the beneficiary, just like a Descendant's Trust. However, when a Contingent Trust terminates, all of the protections are lost. In contrast, Descendant's Trusts continue the benefits of the trust structure for the beneficiary's entire life (and, often, for the lives of the beneficiary's children and grandchildren, too).

In Wills containing "Second Generation Planning," Descendant's Trusts are lifetime trusts. Because each beneficiary's trust lasts for his/her entire life, the protections and benefits that the trust provides last for the beneficiary's entire life. Second Generation Planning also refers to the fact that a couple can plan to avoid federal estate taxes on their assets both in their own combined estate and in the estates of their children (and even their grandchildren) when they die. This type of planning implicates the generation-skipping transfer tax (the GST tax).

Descendant's Trusts with second generation planning (a/k/a "second generation trusts" and "GST trusts") are very flexible. The typical trust has the following terms:

• Each named beneficiary (each child or other descendant) is the primary beneficiary of his/her own separate Descendant's Trust for his/her entire lifetime.
• Usually, the children and other descendants of the primary beneficiary are named as secondary beneficiaries of the primary beneficiary's Descendant's Trust while the primary beneficiary is living. This means that distributions may be made to them from the beneficiary's Descendant's Trust, too.
• Distributions of income and principal can be made to any of the trust beneficiaries to provide for their health, education, support, and maintenance, in their accustomed standard of living. In some cases, customized distribution provisions are permissible.
• If the beneficiary of a Descendant's Trust is "too young" to have control over his/her trust, then someone else–a relative, a bank, a trust company, or any other qualified person or entity–is appointed as the initial trustee of the beneficiary's Descendant's Trust. However, it is customary to give the primary beneficiary the right to become a co-trustee of his/her trust at a certain age (such as 25 or 30) and the right to become the sole trustee of his/her trust at a later age (such as 30 or 35). Serving as a co-trustee for a certain number of years before becoming the sole trustee can be good training.
• The beneficiary usually has a testamentary "power of appointment" (described below) over his/her trust.
• There will be more income tax options with respect to trust income because there is more than one potential income taxpayer. Any beneficiary who receives a distribution of income from the trust will pay income taxes on the share of income he/she receives in his/her own income tax bracket. To the extent that trust income is distributed out of the trust, the trust will not pay income taxes on that distribution (it's an "either/or" situation and not a "double tax" situation).

There are significant non-tax benefits to the typical Descendant's Trust, such as:

• Creditor protection. The trust assets will not be subject to claims of the beneficiary's creditors, so that a large judgment obtained in a lawsuit against the beneficiary will not result in the beneficiary losing the benefits of the inherited assets (to the extent they are still held in the trust).
• Divorce protection. If the beneficiary is married, assets retained in the trust will be trust property, not marital property. Therefore, the trust assets are generally beyond the reach of Texas divorce courts.
• Control. If there are concerns that a particular beneficiary might disinherit his/her own children, that beneficiary's trust can be drafted without a testamentary power of appointment, or the power of appointment can be limited in scope, thus ensuring that, upon the beneficiary's death, the assets remaining in the beneficiary's trust will be distributed to his/her children.
• Management assistance. If a particular beneficiary is not sufficiently skilled (or inclined) to manage his/her trust, that beneficiary's trust can be drafted without giving the beneficiary the power to become the trustee of his/her own trust, thus ensuring that the trust will be managed by a professional (or otherwise qualified) trustee.
• Guardianship avoidance. If a beneficiary becomes incapacitated, the successor trustee of the beneficiary's trust can manage the trust and provide for the beneficiary's needs. Additionally, the assets held in the beneficiary's trust would not be subject to a court-supervised guardianship of the beneficiary's estate.

Without second generation planning, if you leave assets outright to your children and they preserve those assets during their lives, there may be an estate tax on those assets upon their deaths. Your estate (or, the combined estate of you and your spouse) may already have paid estate taxes on those same assets when you died. Thus, that is basically a "double estate tax" on the same assets. Under current law, with second generation planning, an individual can shelter an aggregate amount of up to $13,990,000 (2025 amount), and a couple can shelter an aggregate amount up to $27,980,000 (2025 amount), from future estate taxes that would otherwise be due upon their assets upon the deaths of their children and grandchildren. This amount is called the "GST exemption."

This estate tax avoidance extends to the initial $13,990,000 (2025 amount) plus whatever that amount grows to during the lives of your children. Upon a child's death, assuming proper allocation of each spouse's GST exemption and proper administration of the child's trust, the full amount remaining in the child's trust will be distributed, estate tax free, to new Descendant's Trusts for the child's children. This preserves the GST exemption so that, on each grandchild's death, the trust assets pass estate tax free to the great-grandchildren.

In addition, since the typical Descendant's Trust has multiple beneficiaries (the primary beneficiary and all of his/her children and other descendants), there are multiple potential taxpayers with respect to paying income taxes on the income earned by the trust assets each year (i.e., more income tax options). The income tax liability basically follows the income. So, if the trustee distributes the trust income to one or more of the permissible beneficiaries of the trust, each beneficiary who receives a share of that year's trust income will pay income taxes on the share he/she received, in his/her own income tax bracket. Some of the beneficiaries could be in very low income tax brackets, especially compared to the trust itself, which must pay income taxes on the income it retains. And even if the trust only has one current beneficiary, there are still two potential income taxpayers, the trust itself and the beneficiary, so that the trust's income can be split between the two. When assets pass directly (outright) to beneficiaries, there are no income tax options–all income earned by the inherited assets will be taxable to the beneficiary as the owner of the assets.

Thus, with second generation planning, each generation has use of the trust assets during life and, usually, control over the disposition of the trust assets at death (through exercise of the power of appointment), yet those assets are protected from creditors' claims and spouses suing for a divorce, and are distributed estate tax free to the next generation (subject to the initial limits noted above). Plus, there are more income tax options.

"Contingent Trusts" are simple trusts included in most Wills for beneficiaries who need a trust, but who are not covered by any other trusts created in the Will. It would practically be considered legal malpractice for a Will not to have a Contingent Trust in it, at the very least. Contingent Trusts terminate when the beneficiary reaches the specified termination age (such as age 25); however, it is also common for a Contingent Trust to have multiple staged terminations (e.g., 1⁄3 at age 25, 1⁄2 of the balance at age 30, and the balance at age 35). During the term of the Contingent Trust, the trustee makes distributions from the trust to or for the benefit of the beneficiary for his/her health, support, maintenance and education. If the beneficiary dies before reaching the trust termination age, the assets in the beneficiary's Contingent Trust will usually be distributed to his/her children, if any, otherwise to his/her siblings. In "simple" Wills, Contingent Trusts typically apply to an individual entitled to a share of the estate who is either "too young" (such as a minor) or mentally incapacitated. In Wills with Second Generation Planning, Contingent Trusts usually apply to persons other than children, grandchildren and other descendants (because Descendant's Trusts, which are "higher quality trusts," are used for descendants). When a Contingent Trust terminates due to the beneficiary reaching the specified age, all trust assets are distributed to the beneficiary, outright and free of trust. Thus, all trust benefits expire at that time.

A "power of appointment" gives the beneficiary of a trust the power to decide to whom the trust's assets will be distributed, either while the trust is still in existence (an inter vivos power of appointment) or when the trust terminates on the beneficiary's death (a testamentary power of appointment). A "testamentary" power of appointment usually must be exercised in the beneficiary's Will and, as noted, the power only becomes effective on the beneficiary's death. Powers of appointment may be "limited" so that the group of people to whom the trust assets may be given is restricted, or "general" so that the beneficiary may give the trust assets to his/her estate, and thereby, to anyone named in his/her Will. Possessing and/or exercising a limited power of appointment has no tax consequences for the beneficiary, while merely possessing a general power of appointment makes the trust assets includable in the beneficiary's estate at death (sometimes that is done on purpose, to avoid the more onerous GST tax, for example). One benefit of giving the primary trust beneficiary a testamentary power of appointment over his/her trust is that the beneficiary can address changes that have occurred over time. Since many trusts last for a very long period of time, changes may need to be made to the distribution of the trust assets on the beneficiary's death. For example, suppose a trust beneficiary has two children. Sometime after the beneficiary's trust was established, one of the beneficiary's children invents a popular product and sells it to a large corporation and becomes very wealthy, while the beneficiary's other child develops a debilitating disease that prevents that child from working and results in large health care expenses each year. The "default" in the instrument that created the trust is likely to provide that the assets in the beneficiary's trust are to be distributed in equal shares to his/her two children upon his/her death. By exercising the testamentary power of appointment, the beneficiary can change that default distribution and provide a larger share (and a special needs trust, if applicable) for his/her child who is seriously ill. 

"Fiduciary" is the generic term applied to anyone acting on behalf of another to manage assets that have been entrusted to the Fiduciary. Most Wills appoint two types of fiduciaries: An "Executor" and a "Trustee." The Executor is the person generally responsible for handling the "post-death process," which involves collecting and preserving your assets, filing all required tax returns (for you and for your estate), winding up your affairs, and fulfilling the provisions of your Will (i.e., establishing and funding the trusts created in your Will, re-titling and distributing assets to the proper recipients, etc.). The Trustee is the person responsible for the (usually) long term job of administering the trusts you create (i.e., managing investments, making distributions to the beneficiaries of the trust, filing income tax returns for the trust, etc.). The same person can be both a Fiduciary and a beneficiary, and the same person can be both an Executor and a Trustee. Different trusts can have different Trustees.

As already noted, the term "survivorship account" generally refers to an account or other asset that has "rights of survivorship." Under Texas law, when an account or other asset is registered or titled as "joint tenantswith right of survivorship" (JTWROS) or gives other effective indications of a survivorship right, your Will does not control passage of the funds or assets in that account upon your death. Rather, upon your death, the account passes by "right of survivorship" to the persons named as the "survivors" on the account and not to the persons (or to the trusts created for the persons) named in your Will.

These rights typically apply to: (i) bank accounts, brokerage accounts, stock certificates, or other accounts that are registered in both of your names (or in your name(s) with one or more other individuals) as "joint tenants with right of survivorship"; and (ii) all federal savings bonds held in two or more joint names with "or" between the names. Survivorship issues also apply to: (a) accounts registered as "community property with rights of survivorship"; (b) accounts registered in your name(s) as "trustee" for one or more named individuals; and (c) accounts marked "pay on death" ("POD") or "transfer on death" ("TOD") to another party. In Texas, it is uncommon for survivorship rights to apply to real estate.

Some accounts that are registered in two or more names are not survivorship accounts. They are "co-tenant" "tenants in common" or "convenience" accounts. They do not have a survivorship feature, so they do not become the property of the survivor. Instead, when one owner dies, his or her interest in the account passes under his or her Will. Since the account holder's Will controls his or her interest in non-survivorship joint accounts, these accounts avoid the problems caused by survivorship accounts. In fact, many people add one or more family members as signers on accounts so that the accounts can be accessed in the event of the owner's disability. These accounts, if properly styled as convenience accounts, do not give rise to the problems associated with survivorship accounts.

Many times bank or brokerage statements will indicate survivorship language on their account statements. They often list two names, followed by the designation "JTWROS," "CPWROS," "Jt. w/ Surv.," "Jt. Ten." or with some other indication of survivorship. However, not all survivorship accounts are so clearly labeled. More importantly, survivorship is governed by the account agreement or signature card that was signed when the account was opened (or when someone's name was added to the account), not the description of the account in the account statement. The only way to be sure a joint account is not a survivorship account is to obtain and review a copy of the account agreement or signature card.

Savings and loan institutions, banks, and brokerage companies furnish these "right-of- survivorship" accounts thinking that they are convenient for their clients. Survivorship accounts provide a simple way for people to provide access to their accounts upon the depositor's death. Unfortunately, many people establish these accounts without realizing the impact they have on their estate plan in their Wills.

Some people fear that upon their death, their financial assets will be "frozen," and therefore unavailable to family members. This is not what Texas law provides, but it does happen. Under clear Texas law, banks are authorized to continue to honor checks drawn on, and withdrawals made from, accounts by any signer on the account, even if the other account holderis deceased. Texas law does not necessarily apply to brokerage accounts holding securities, however. Therefore, with respect to bank accounts holding cash, it is not technically necessary to include a survivorship feature on an account to maintain access to the account after death. Convenience or co-tenant accounts accomplish the same result without interfering with your estate plan. Because of the risk of an account being "frozen" on death, however, if providing immediate access for your family members to a certain amount of funds is important, then it is all right to have one account of a modest size with a right of survivorship or a POD or TOD arrangement. Just be sure that you don't cause any "gift tax problems" for your family members by naming just one, and not all, persons in the same degree of relationship to you as the surviving joint tenant(s) or POD or TOD beneficiaries. (The relevant gift tax issues are beyond the scope of this FAQ; however, there are newsletters under the Resource tab that explain the gift tax issues in more detail.)

For people of modest means who either have no Wills or else have Wills that contain no estate tax or trust planning, survivorship accounts are often fine. Survivorship accounts between a husband and wife are also OK where the estate plan is a "disclaimer plan" (in which the Wills provide that everything passes outright to the surviving spouse, except that if the survivor makes a disclaimer, the disclaimed assets pass to a Disclaimer Trust for the survivor). In addition, many couples have household checking accounts or other accounts that are intended to pass outright to the surviving spouse, and persons who want to make a specific cash gift may put the cash, etc. in a POD or other survivorship account. So long as the dollar amounts are relatively small, survivorship provisions in these situations generally do not cause a problem; however, the account holder must understand that the account will pass outright to the person(s) named in the survivorship provision (if he or she survives), and not to the person(s) named in the account holder's Will (including the Executor, who may need the funds to pay estate debts, taxes and expenses). In most other cases, survivorship accounts should be avoided.

You should make certain that none of your accounts or other assets are registered in the form of "joint tenants with right of survivorship," "JTWROS," "CPWROS," "POD," "TOD" or as "Trustee" for another individual. Instead, a married couple's joint community property accounts should simply be registered as "Community Property" (without rights of survivorship), if that form of registration is available. If the Community Property form of registration is not offered (or if the property is not community property), the account may be registered as "Tenants in Common." Sometimes neither form of titling is available. Another acceptable form of title for joint accounts is listing both names but negating any survivorship rights (such as, "Joint Tenants Without Right of Survivorship").

It is preferable that you change the title on accounts currently held with right of survivorship by signing new account agreements. But, as an alternative, you may want to consider sending to each applicable financial institution the sample form letter below. Delivery of this notice should terminate most survivorship and POD arrangements (per Texas law). If you choose to do so, you should obtain some sort of written receipt (for example, a receipt signed by a financial institution representative, or a certified mail return receipt) so you can prove delivery. Note: The notice will not work for accounts registered in your name(s) as "trustee" for one or more named individuals; to revise those accounts you must sign new account agreements.

Click here to view the letter template.

The term "survivorship account" generally refers to an account or other asset that has "rights of survivorship." Under Texas law, when an account or other asset is registered as "joint tenants with right of survivorship" or gives other effective indications of a survivorship right, your Will does not control passage of the property. Rather, upon your death, the account or property passes by "right of survivorship" to the persons named in the survivorship provision, not the persons named in your Will.

These rights typically apply to: (i) bank accounts, brokerage accounts, stock certificates, or other accounts that are registered in two or more joint names as "joint tenants with right of survivorship"; and (ii) all federal savings bonds held in two or more joint names. Survivorship issues also apply to: (a) accounts registered in your name as "trustee" for one or more named individuals; and (b) accounts marked "pay on death" ("POD") or "transfer on death" ("TOD") to another party. In Texas, it is uncommon for survivorship rights to apply to real estate.

Some accounts that are registered in two or more names are not survivorship accounts. They are "co-tenant" or "convenience" accounts. They do not have a survivorship feature, so they do not become the property of the survivor. Instead, when one owner dies, his or her interest in the account passes under his or her Will. Since the account holder's Will controls his or her non-survivorship joint accounts, these accounts avoid the problems of survivorship accounts. In fact, many people add one or more family members as signers on accounts so that the accounts can be accessed in the event of the owner's disability. These accounts, if properly styled as convenience accounts, do not give rise to the problems associated with survivorship accounts.

Many times bank or brokerage statements will indicate survivorship language on their account statements. They often list two names, followed by the designation "JTWROS," "Jt. w/ Surv.," "Jt. Ten." or with some other indication of survivorship. However, not all survivorship accounts are so clearly labeled. More importantly, survivorship is governed by the account agreement or signature cards that were signed when the account was opened (or when someone’s name was added to the account), not the description of the account on the statement. The only way to be sure a joint account is not a survivorship account is to obtain and review a copy of the account agreement or signature card.

Savings and loan institutions, banks, and brokerage companies furnish these "right-of- survivorship" accounts thinking that they are convenient for their clients. Survivorship accounts provide a simple way for people to provide access to their accounts upon the depositor’s death. Unfortunately, many people establish these accounts without realizing the impact they have on an individual's estate planning matters.

Some people fear that upon their death, their financial assets will be "frozen," and therefore unavailable to family members. This is not the case in Texas. Banks are authorized to continue to honor checks drawn on, and withdrawals made from, accounts by any signer on the account, even if the other account holder is deceased. Therefore, it is not necessary to use a survivorship feature on an account to maintain access to the account after death. Convenience or co-tenant accounts accomplish the same result without interfering with your estate plan.

For people of modest means who either have no Will or else have a Will that contains no estate tax or trust planning, survivorship accounts are often fine. In addition, many people have household checking accounts or other accounts that are intended to pass outright to the surviving account holder, and persons who want to make a specific cash gift may put the cash, etc. in a POD or other survivorship account. So long as the dollar amounts are relatively small, survivorship provisions in these situations generally do not cause a problem; however, the account holder must understand that the account will pass outright to the person(s) named in the survivorship provision (if he or she survives), not the person(s) named in the account holder's Will (including the Executor, who may need the funds to pay estate debts). In most other cases, survivorship accounts should be avoided.

You should make certain that none of your accounts or other assets are registered in the form of "joint tenants with right of survivorship," "JTWROS," "POD," "TOD" or as "Trustee" for another individual. Instead, your accounts should simply be registered as "Tenants in Common" or as "Joint Tenants Without Right of Survivorship," or in your individual name without any indication of a survivorship right. If you want another person to help you with your account, that person can be added to your account as a "co-signer" and the account can be labeled a "convenience account" (but it should not have a survivorship feature).

It is preferable that you change the title ownership on accounts currently held with right of survivorship by signing new account agreements. But, as an alternative, you may want to consider sending to each applicable financial institution the sample form letter below. Delivery of this notice will terminate most survivorship and POD arrangements. If you choose to do so, you should obtain some sort of written receipt (for example, a receipt signed by a financial institution representative, or a certified mail return receipt) so you can prove delivery. Note: The notice will not work for accounts registered in your name as "trustee" for one or more named individuals; to revise those accounts you must sign new account agreements.

Click here to view the letter template.

A "Crummey" Trust is simply a trust containing withdrawal rights. The name comes from a taxpayer who used withdrawal rights in an irrevocable trust in the 1960's. The IRS challenged him, and he was forced to go to court. Mr. Crummey won his case--the court held that granting withdrawal rights was a valid estate planning technique. Since that time, Crummey withdrawal rights have become widely used in estate planning.

Normally, gifts to a trust do not qualify for the $19,000 (2025 amount) "present interest exclusion" from federal gift taxes (described below). However, when the trust beneficiaries have withdrawal rights, gifts to the trust will qualify for the exclusion.

Under the Internal Revenue Code, the so-called "present interest exclusion" allows every individual to make gifts of up to $19,000 per year per recipient without any gift tax concerns. The exclusion is computed on a per donor (gift-giver) per donee (gift recipient) basis. So, for example, a married couple with three children can make tax free gifts of up to $114,000 per year to their children (6 x $19,000). Gifts in excess of the exclusion--or gifts that do not qualify for the exclusion--count against the donor's lifetime federal gift tax exemption amount, which is currently $13,990,000 (2025 amount).

Withdrawal rights give each beneficiary a limited window of time to withdraw up to his or her pro rata share of gifts made to the trust each year (not to exceed $19,000 per year). Beneficiaries with withdrawal rights may either exercise the right (i.e., take the money) or choose not to, in their own absolute discretion. However, if the beneficiary is a minor, then his or her parent or guardian exercises the right (or elects not to exercise the right) for the beneficiary. For tax purposes, a gift to a trust with withdrawal rights is treated like a direct gift to the beneficiaries who have the withdrawal rights. As a result, the gift qualifies for the present interest exclusion.

Generally, there are two basic types of withdrawal rights that can be included in a trust agreement: "full" withdrawal rights and "5 & 5" withdrawal rights. A beneficiary with a "full" withdrawal right has the right to withdraw all or any part of his or her pro rata share of every gift, up to the $19,000 annual exclusion. A full withdrawal right thus takes full advantage of the gift tax annual gift tax exclusion. So, in the above example, if a husband and wife with three children give $114,000 to a trust for their children, and if the children all have full withdrawal rights, each child has the power to withdraw up to $38,000, and the full $114,000 is covered by the parents' combined exclusions.

A beneficiary with a 5 & 5 withdrawal right is generally limited to withdrawing the lesser of the $19,000 annual exclusion amount and the "5 & 5" amount. The 5 & 5 amount is the greater of $5,000 or 5% of the value of the trust on the last day of the year in which the gift is made. Also, while the present interest exclusion is computed on a per donor per donee basis, the 5 & 5 amount is computed on a simple per donee basis: each donee gets only one 5 & 5 amount per year even if there are multiple donors.

So, returning to the above example, if a husband and wife with three children give $114,000 to a trust for their children (and that is the only amount in the trust), and if the children all have 5 & 5 withdrawal rights, the 5 & 5 amount limits each child's withdrawal right to $5,700, and only $17,100 of the gift (3 x $5,700) qualifies for the exclusion; the remaining $96,900 counts against the parents' respective $13,990,000 lifetime gift tax exemption amounts. However, if the value of the trust (including the $114,000 gift) were at least $760,000, then the 5 & 5 amount would not limit the withdrawal right (because 5% of $760,000 is $38,000), and the full $114,000 would qualify for the exclusion.

All withdrawal rights eventually terminate or "lapse." The exact timing and nature of the lapses will be described in detail in the trust agreement. However, as a general rule, a beneficiary's withdrawal right--other than a "hanging" withdrawal right (described below)--will lapse somewhere between 30 and 90 days after the beneficiary receives notice of the gift.

A "hanging" withdrawal right (a/k/a "hanging power") differs from an ordinary withdrawal right in the manner of its lapse. Like an ordinary withdrawal right, a hanging withdrawal right will generally be fully exercisable for 30 to 90 days. Unlike an ordinary withdrawal right, a hanging withdrawal right does not lapse completely at the expiration of the stated term; instead, it lapses only to the extent of the 5 & 5 amount (discussed above). The excess amount, if any, does not lapse until the following year (or later). Further, all lapses in a single calendar year are aggregated and must stay within the 5 & 5 limit.

For example, if a $10,000 gift was made to a trust in year 1 and the beneficiary had a 5 & 5 withdrawal right, $5,000 of his withdrawal right would lapse in year 1 and the remaining $5,000 would not lapse until the following year. If a second $10,000 gift was made in year 2, no portion of this second gift would lapse during year 2 because the first gift's lapse would have already exhausted the 5 & 5 limit on lapses in year 2. If this scenario repeated for several years the total amount subject to withdrawal could be substantial.

On the other hand, if (or when) the value of the trust becomes large enough or the donors stop making gifts to the trust, the lapses would catch up with the gifts and, eventually, the withdrawal rights would lapse completely. For instance, if a trust's only asset was a $1,000,000 life insurance policy insuring the life of the grantor, the 5 & 5 amount would probably be $5,000 during the grantor's life (assuming the cash value was $100,000 or less) but in the year of the grantor's death--when the $1,000,000 proceeds would be received--the 5 & 5 amount would increase to $50,000. As a result, the outstanding withdrawal rights would begin lapsing at a rate of $50,000 per year instead of $5,000 per year.

Life insurance is subject to estate tax if the insured person owns or controls the life insurance contract (policy) in anyway. Therefore, estate taxation of life insurance often can be avoided if the insured is willing to part with all "incidents of ownership" in the policy. "Incidents of ownership" include all rights to benefit from or control the insurance policy. Thus, for example, they include the right to change the beneficiary; the right to borrow against the policy; the right to surrender the policy for its cash value; and the right to pledge the policy as collateral for a loan.

If someone other than you buys insurance on your life, and holds all incidents of ownership over the policy, the death benefits will be completely excluded from your gross estate for federal tax purposes. In other words, third-party ownership of life insurance makes the death benefits estate tax free. Some people select their adult children to serve as owners. Frequently, however, the third party selected to own the insurance is an "irrevocable life insurance trust" ("ILIT").

Using an ILIT to own the insurance offers some significant advantages over individual ownership of the policy by the insured's children. For example:

• If you intend for your spouse to benefit from the life insurance, an ILIT can be used to provide for the surviving spouse, with any balance remaining at the spouse's death passing to the children.
• An ILIT can be structured to continue after your death as a vehicle to manage and preserve wealth for your children (and/or grandchildren). For example, optional management assistance can be provided by naming a trusted family member to serve as trustee, or by naming a professional trustee or co-trustee. And holding the proceeds in trust can preserve their exemption from creditors' claims and keep them beyond the reach of a divorce court's property settlement powers.
• If properly structured, an ILIT can not only avoid estate taxes on your death, but also--substantially if not entirely–on your children's deaths. Insurance on your life owned directly by your children--to the extent not consumed by them during their lifetimes--will be included in their estates for federal estate tax purposes when they die.
• With an ILIT, you can control the future beneficial ownership of the insurance (for example, you might provide for trusts that last for your children's respective lives and then continue for the lives or their children). However, if your children own the insurance directly, they can sell and/or will their interest in the policy to whomever they please.
• With an ILIT, you can provide a source of cash to the executor of your estate for the payment of estate taxes. (Generally, an ILIT will be coordinated with your Will to facilitate this.) However, if your children own the insurance directly, it may not be possible to force them all to apply their respective shares of the insurance proceeds toward the payment of your estate taxes.

If you transfer a life insurance policy on your life that you already own to a third party, such as an ILIT, you must survive for at least three years after the transfer date in order for the insurance proceeds to be estate-tax free; otherwise, the insurance will be treated as if you had never parted with it. On the other hand, if someone other than you is the initial purchaser of the insurance policy, the three-year rule does not apply. Therefore, if you are planning to purchase a new insurance policy on your life and you want that policy to be owned by another person (such as an ILIT), that person should acquire the policy from its inception. For example, if you use an ILIT to own insurance on your life, you can avoid the three-year rule if you establish the ILIT before you acquire the policy, and then let the ILIT actually purchase the insurance policy on your life as the original owner.

If you transfer an existing policy into the ILIT and that policy is paid up, you will not have to worry about future premiums. If the existing policy is not paid up, and in virtually all cases involving new policies, you will have to provide the money for future premium payments. You have two options. First, you can transfer a lump sum to the ILIT up front, and then the Trustee of the ILIT can use that sum (and the income it earns) to pay the premiums. The second and more commonly used option is to make regular (usually annual) cash gifts to the ILIT that are large enough to cover the premiums as they become due.

Every transfer that you (or anyone else) makes to the ILIT will be treated as a gift, which is potentially subject to gift tax. For example, if you transfer an existing policy to the ILIT, you have made a gift roughly equal to the current cash value of the policy. Likewise, when you make additional cash transfers to the ILIT to provide for the payment of premiums, those transfers are treated as gifts, too. If a "taxable gift" is made, a gift tax return (Form 709) must be filed. A taxable gift is a gift that either exceeds the donor's (gift giver's) annual exclusion from the gift tax or does not qualify for the gift tax annual exclusion. However, even if you make a taxable gift, which simply means a gift that must be reported in a gift tax return, no gift tax is paid until the total of all taxable gifts you have made exceeds your lifetime gift tax exclusion amount ($13,990,000 in 2025).

Fortunately, not all gifts are subject to gift tax. A properly drafted ILIT will avoid gift tax by taking advantage of the $19,000 per year (2025 amount) "present-interest exclusion." Outright gifts of cash to your children clearly qualify for the $19,000 per year present-interest exclusion. If an ILIT is used, however, the rules are more complex. The $19,000 per year gift tax exclusion is available only for gifts that qualify as "present interests." Gifts to trusts are usually treated as gifts of a future interest, which do not qualify for the exclusion. To avoid this problem, most ILITs contain "withdrawal rights." By giving each beneficiary of the ILIT the present right to withdraw the amount of any gifts made to the ILIT (up to $19,000 per beneficiary per year), those gifts qualify as present-interest gifts, which are not subject to gift tax. (Note that if you intend for the funds in the ILIT to be excluded from estate taxation in your children's estates, a gift tax return should nevertheless be filed to enable you to allocate a portion of your "generation-skipping transfer tax" exemption to transfers made to the ILIT.)

Most ILITs contain withdrawal rights which give each beneficiary a limited window of time to withdraw his or her pro rata share of the gift(s) made to the ILIT for that year (not to exceed $19,000 per beneficiary per year). If the beneficiary is a minor, then his or her parent or guardian exercises (or elects not to exercise) the withdrawal right for the beneficiary. Beneficiaries with withdrawal rights may either exercise the right (i.e., take the money) or choose not to--in their own, absolute discretion. This is one aspect of the ILIT that can be troubling to clients. However, in the vast majority of cases, the children will understand your estate planning goals (that is, that you are trying to minimize taxes and maximize the children's inheritance). As a result, they will usually choose not to make a withdrawal.

An agent is a "fiduciary". As a result, the agent must act with the utmost honesty in carrying out the wishes of the person who has appointed the agent to act. While a Power of Attorney may appoint an agent to serve for a limited purpose or for a limited period of time, most Powers of Attorney give broad authority to the agent. Third parties are entitled to rely upon information and instructions given to them on your behalf by your agent. For example, if your agent signs a check on your account, and the bank has received a copy of the Power of Attorney from you or from the agent, the bank is entitled to honor the check as though it were signed by you. As you can see, naming someone to serve as your agent gives that person substantial power over your financial affairs. As a result, careful thought should be given to the person or persons that you select to serve as your agent.

As its name implies, a Medical Power of Attorney enables someone to act on your behalf during your lifetime regarding medical treatment decisions. Again, many people appoint their spouse or another trusted family member to serve as their "agent." One or more alternate agents are usually named. This form applies only in the event that you are incapacitated and unable to make medical treatment decisions on your own behalf. Even after you have signed this document, you have the right to make health care decisions for yourself as long as you are able to do so and treatment cannot be given to you or stopped over your objection. Texas law requires that you read and sign an information statement attached to the Medical Power of Attorney.

A Directive to Physicians and Family or Surrogates (sometimes called a "Directive" or "Living Will") evidences your intentions whether to withhold or continue life sustaining treatment in the event you have an "irreversible condition" or a "terminal condition." However, if you want the agent named in your Medical Power of Attorney to control the decision to either withhold or continue life sustaining treatment, you do not need a Directive. This is because, whenever you do not have a Directive, Texas law gives this authority to the agent under your Medical Power of Attorney. If you do not want your Medical Power of Attorney agent to have the authority (and you want to specify your preferences in writing), you do need a Directive. The Directive applies only if you are otherwise unable to communicate your wishes. It may be revoked by you at any time. The information statement attached to the Directive provides additional details as to its purpose and effect.

Most Wills (or Trusts) created for individuals who own significant assets provide for "Descendant's Trusts" for children, grandchildren and other descendants. Some Wills include "Child's Trusts" for children only. Others include Child's Trusts for children and Descendant's Trusts for grandchildren and other descendants. Both trusts for children and trusts for grandchildren and other descendants can be called, "Descendant's Trusts." In any case, each child or other descendant is the named primary beneficiary of his/her own separate trust. The beneficiary's own children and other descendants are often included as additional (secondary) beneficiaries of the beneficiary's trust to whom distributions can be made while the primary beneficiary is living. This adds flexibility and increases the income tax options. When the primary beneficiary dies, the assets remaining in his/her Descendant's Trust will usually be distributed to new Descendant's Trusts for his/her children, but it is typical to give the primary beneficiary of a Descendant's Trust a testamentary power of appointment (see below).

In Wills without second generation planning, "Contingent Trusts" are used. Contingent Trusts terminate when the beneficiary reaches the specified age (such as age 25), but it is also common for a Contingent Trust to have multiple staged terminations (e.g., 1⁄3 at age 25, 1⁄2 of the balance at age 30, and the balance at age 35). If the beneficiary dies prematurely, the remaining assets in his/her Contingent Trust will be distributed to his/her children, if any, otherwise to his/her siblings. Until the time that the Contingent Trust terminates, the trust protects the beneficiary, just like a Descendant's Trust. However, when a Contingent Trust terminates, all of these protections are lost.

In Wills (or Trusts) containing second generation planning, the Child's Trusts and Descendant's Trusts are lifetime trusts. Because each beneficiary's trust lasts for his/her entire life, the protections and benefits that the trust provides also last for the beneficiary's entire life.

Note that second generation planning implicates a federal tax that is separate (and, often, in addition to) the federal estate tax and the federal gift tax: the generation- skipping transfer tax (GST tax).

Child's Trusts and Descendant's Trusts with second generation planning (a/k/a "second generation trusts") are very flexible. The typical trust has the following terms:

• Each beneficiary (each child or other descendant) is the named primary beneficiary of his/her own separate lifetime trust.
• The beneficiary's children and/or other descendants are usually secondary beneficiaries of the beneficiary's trust while the beneficiary is living.
• Distributions of income and principal can be made to any of the trust beneficiaries to provide for their health, education, support, and maintenance. In some cases, customized distribution provisions are permissible.
• A relative, a bank or a private trust company, or any other qualified person or entity is usually appointed as the initial trustee of the beneficiary's trust; however, the beneficiary is usually given the right to become a co-trustee at one age (usually age 25 or 30) and the right to become the sole trustee at a subsequent age (usually 5 years subsequent to the co-trustee age).
• The beneficiary usually has a testamentary "power of appointment" (described below) over his/her trust.
• There will be more income tax options with respect to trust income because there is more than one potential income taxpayer.

There are significant non-tax benefits to the typical Child's Trust or Descendant's Trust with second generation planning:

• Creditor protection. The trust assets will not be subject to claims of the beneficiary's creditors, so that a large judgment obtained in a lawsuit against the beneficiary will not result in the beneficiary losing the benefits of the inherited assets (to the extent they are still held in the trust).
• Divorce protection. If the beneficiary is married, assets retained in the trust will be trust property, not marital property. Therefore, the trust assets are generally beyond the reach of Texas divorce courts.
• Control. If there are concerns that a particular beneficiary might disinherit his/her own children, that beneficiary's trust can be drafted without a testamentary power of appointment, or the power of appointment can be limited in scope, thus ensuring that, upon the beneficiary's death, the beneficiary's trust will pass to his/her children.
• Management assistance. If a particular beneficiary is not sufficiently skilled (or inclined) to manage his/her trust, that beneficiary's trust can be drafted without giving the beneficiary the power to become the trustee of his/her own trust, thus ensuring that the trust will be managed by a professional (or otherwise qualified) trustee.
• Guardianship avoidance. If a beneficiary becomes incapacitated, the successor trustee of the beneficiary's trust can manage the trust and provide for the beneficiary's needs. Additionally, the assets held in the beneficiary's trust would not be subject to a court-supervised guardianship of the beneficiary's estate.

Without second generation planning, if you leave assets outright to your children and they preserve those assets during their lives, there may be estate taxes on those assets upon their deaths. Your estate may already have paid estate taxes on those same assets when you died. Thus, that is basically a "double estate tax" on the same assets. Under current law, with second generation planning you can shelter an aggregate amount of up to $13,990,000 (2025 amount) as of your date of death (or the date when you make a lifetime transfer to your children's Descendant's Trusts) from all future estate taxes that would otherwise be due upon the deaths of your children and grandchildren. This amount is called the "GST exemption," which is the exemption from the GST tax.

This estate tax avoidance extends to the initial $13,990,000 (2025 amount) plus whatever that amount grows to during the lives of your children. Upon a child's death, assuming proper allocation of your GST exemption and proper administration of the child's trust, the full amount remaining in the child's trust will be distributed, estate tax free, to new Descendant's Trusts for the child's children. This preserves the GST exemption so that, on each grandchild's death, the trust assets pass estate tax free to great-grandchildren. Thus, with second generation planning, each generation has use of the trust assets during life and, usually, control over the disposition of the trust assets at death (through exercise of the power of appointment), yet those assets are protected from creditors claims and spouses suing for a divorce, and pass estate tax free to the next generation (subject to the above limits).

Virtually all Wills (and Trusts) provide for "Contingent Trusts" for beneficiaries who need a trust but are not covered by any other trusts created in the Will (or Trust). It would practically be considered legal malpractice for a Will or Trust not to have a Contingent Trust, at least. In "simple" Wills, Contingent Trusts typically apply to children, grandchildren, and other persons who might inherit any assets and who are either "too young" to receive their share outright or mentally incapacitated. In Wills (or Trusts) with Second Generation Planning, Contingent Trusts usually apply to persons other than children, grandchildren and other descendants. Pursuant to a simple Will (or Trust), whenever assets would otherwise be distributed to a covered person who is either incapacitated or too young to manage the assets prudently, those assets are retained in a separate Contingent Trust. The trustee makes distributions from the Contingent Trust for the beneficiary's health, support, maintenance and education. A Contingent Trust usually terminates at a specified age (or ages). Thus, all trust benefits expire at that time.

A "power of appointment" enables the beneficiary of a trust to decide to whom the trust's assets will be distributed when the trust terminates. A "testamentary" power of appointment means that the power may be exercised only in the beneficiary's Will and the power only becomes effective on the beneficiary's death. Powers of appointment may be "limited" so that the group of people to whom the trust assets may be given is restricted, or "general" so that the beneficiary may give the trust assets to his/her estate, and thereby, to anyone named in his/her Will.

"Fiduciary" is the generic term applied to anyone acting on behalf of another to manage assets that have been entrusted to the Fiduciary. Most Wills appoint two types of fiduciaries: An "Executor" and a "Trustee." The Executor is the person generally responsible for handling the "post-death process," which involves collecting and preserving your assets, filing all required tax returns (for you and for your estate), winding up your affairs, and fulfilling the provisions of your Will (i.e., establishing and funding the trusts created in your Will, re-titling and distributing assets to the proper recipients, etc.). The Trustee is the person responsible for the (usually) long term job of administering the trusts you create (i.e., managing investments, making distributions to the beneficiaries of the trust, filing tax returns for the trust, etc.). The same person can be both a Fiduciary and a beneficiary, and the same person can be both an Executor and a Trustee. Different trusts can have different Trustees.

A Bypass Trust is a trust designed to hold assets of the deceased spouse having a total value equal to (or not exceeding) the Tax Free Amount. The surviving spouse or any other qualified person or entity may serve as trustee of a suitably drafted Bypass Trust. Under the terms of a typical Bypass Trust, distributions can be made to the surviving spouse to provide for his or her health, support and maintenance in accordance with his or her accustomed standard of living. A Bypass Trust can be drafted to allow distributions to be made to children and other descendants as "secondary" beneficiaries while the surviving spouse is living. Those secondary beneficiaries are often in lower tax brackets than the trust itself and the surviving spouse. Thus, including a power to make distributions from the Bypass Trust to children and grandchildren sets up the possibility of trust income being taxed at very low rates. When trust income is distributed out of the trust to a permissible beneficiary, the beneficiary pays income tax on the distributed income, not the trust. The surviving spouse is sometimes given a testamentary"power of appointment" (described below) over the Bypass Trust. In spite of the fact that the surviving spouse has use of the trust assets during his or her lifetime (and may be given control over the disposition of the property at death), the assets in a properly drafted and administered Bypass Trust will not be taxed in the surviving spouse's estate at the time of that spouse's death–no matter what those assets are worth at that time and no matter what the estate tax exemption amount is at that time. The Bypass Trust terminates upon the death of the surviving spouse or, if later, the date when the youngest child reaches a designated age.

A Marital Trust is a trust designed to hold the Marital Deduction Amount, i.e., the portion of the deceased spouse's estate in excess of the amount that is exempt from estate tax (i.e., the Tax Free Amount). The value of property passing to the Marital Trust is deducted from the taxable estate of the deceased spouse, effectively deferring estate taxes on these assets until the surviving spouse's death. The surviving spouse or any other qualified person or entity may serve as trustee of a suitably drafted Marital Trust. Per federal tax law, all (net) income earned by the Marital Trust assets must be distributed to the surviving spouse each year. Distributions of principal can be made to the surviving spouse to provide for his or her health, support and maintenance in accordance with his or her accustomed standard of living. Upon the death of the surviving spouse, the assets in the Marital Trust (on which estate taxes were deferred), as well as the surviving spouse's individually owned assets, will be subject to estate tax to the extent the total exceeds the surviving spouse's Tax Free Amount.

As a result of the Tax Cuts and Jobs Act passed in December 2017, which increased the basic estate tax exclusion amount to $10 million, adjusted for inflation, for years 2018 through 2025, some married couples prefer to use a Marital Trust, rather than a Bypass Trust, for the entire amount owned by the deceased spouse (i.e., the first spouse to die). The primary reason to do that is to obtain a second "adjustment" to income tax basis for the "capital assets" held in the Marital Trust when the surviving spouse dies. If the assets have increased in value by the time of the surviving spouse's death, that adjustment will be a "step up" in basis. In view of the fact that the Marital Trust assets will be included in the surviving spouse's estate (unless the executor of the deceased spouse's estate elects otherwise), if it appears that one exemption from the federal estate tax will not be sufficient to avoid estate taxes on the surviving spouse's death, the executor of the deceased spouse's estate can file a federal estate tax return (Form 706) within nine months of the deceased spouse's death (or by the extended due date, if elected) and make the portability election. When the portability election is made, the deceased spouse's unused estate tax exemption amount, called the "DSUE Amount" (which is the full amount passing into the Marital Trust plus all amounts passing directly to the surviving spouse, assuming the surviving spouse is a US citizen), can be transported to the surviving spouse, which will result in the surviving spouse having more than just one exemption from the estate tax when the surviving spouse dies (i.e., his/her own exemption and the DSUE Amount of the deceased spouse that was transported to the surviving spouse by filing the Form 706 and making the portability election).

When deciding between a Marital Trust and outright gifts to the surviving spouse, there are both tax and non-tax reasons for choosing a Marital Trust. Like all irrevocable trusts, the Marital Trust can be designed to protect the assets from loss due to a divorce or other lawsuit, can provide for management of the trust assets in the event the surviving spouse loses his or her mental capacity or is not financially astute, and can protect the trust assets from being diverted to a new spouse of the surviving spouse or to other persons who the deceased spouse does not want to benefit. In addition, use of a Marital Trust can facilitate "second generation planning" for children and grandchildren.

AContingent Trust is a trust designed to hold assets that would otherwise be distributed to an individual who is either mentally incapacitated or too young to manage the assets prudently. It enables the trustee to make distributions to or for the benefit of that person, without subjecting the assets to a court-supervised legal guardianship.

A "power of appointment" enables the beneficiary of a trust to decide to whom the trust's assets will pass. A "testamentary" power of appointment means that the power may be exercised in the beneficiary's Will and will be effective on the beneficiary's death. Powers of appointment may be "limited" so that the group of people to whom the trust assets may be given is restricted, or "general" so that the beneficiarymay give the trust assets to his or her estate, and thereby, to anyone named in his or her Will.

"Fiduciary" is the term applied to anyone acting on behalf of another to manage assets that have been entrusted to the Fiduciary. The term includes an executor (who has been entrusted by the decedent to manage the assets of the decedent's estate for the estate's beneficiaries) and a trustee (who has been entrusted with the assets of the trust to manage them for the trust's beneficiaries). The same person can be both a "Fiduciary" and a beneficiary.