The tools used to build an estate plan are widely known – wills, trusts, power of attorney –and they are used by pastors and lay persons alike. We have previously discussed some of the unique considerations vocational pastors ought to consider as they begin the important effort of building their own estate plan here: https://www.thenonprofitteam.com/resources/estate-planning-for-pastors.
In this article we identify the basic steps you should undertake as you begin building your estate plan.
1. Take Stock of Assets and Liabilities
First, take a basic assessment of all your assets as well as all your debts. Much like building a family or church budget, you first need to understand exactly what it is you have both in terms of assets (cash, retirement funds, personal property, land, intellectual property, life insurance policies, etc.) and debts (mortgages, car payments, credit card debts, medical bills, student loans, etc.). While most people understand that upon their death their assets will be given to designated family, friends, or even a church or other charitable institution, many people fail to realize that certain debts do not just disappear into thin air upon the debtholder’s death, and instead become a part of the estate’s debt. This has a two-fold impact: it can significantly reduce or eliminate the amount of assets your family receives and could leave your family members stuck resolving debts after your passing. Additionally, debts passed to your family upon your death may embroil them in collection disputes over those outstanding debts for which the estate is now responsible. For these reasons, we strongly encourage the development of a plan to manage debt that will be transferred to your estate. There are a few tools to do this. For example, purchasing an ample life insurance policy whose death proceeds are sufficient to pay off your major debts, such as a mortgage, is one step to ensure your estate (and thereby your family) is not saddled with your debt at your death. As an added measure, you can work to pay those debts off yourself if feasible. Regardless, you want to have a proactive plan in place to satisfy your debts, either in life or death.
2. Create a Will and Trust
Wills and trusts are tools for managing how assets and liabilities are transferred after death. If you do not have a will or a trust to manage your assets, a probate court will direct how the assets of a deceased person are dispersed in accordance with Texas Probate law. For example, if you own titled property, a house or a car, those assets will have to pass through probate. This means your family will have to appear before a judge and potentially hire legal counsel before the house or car can be sold or even transferred into another person’s name. If a dispute arises between family members, then the cost of probate will only continue to increase for the family. A will or a trust reduces the burden of probate or avoids probate in its entirety.
A will names an executor, a person responsible for administering or divvying out the assets of the deceased, and names the beneficiaries who will receive assets upon the deceased person’s death. A will is not a contract. The beneficiaries do not have any rights to the assets until the deceased person’s death. A will must be probated, meaning the will and the executor must appear before a judge and authenticate the will as belonging to the deceased. In Texas, a special affidavit can be signed and attached within the will that validates the authenticity of the will. This special affidavit serves as witness testimony to the authenticity of the will and reduces the time spent in court and subsequent legal fees. After a judge approves a will, letters testamentary are issued, which allow the executor to begin moving money, selling property, or transferring assets.
A trust is a legal document that, once funded, operates outside the probate system described above. For the trust to be fully operational and not just fancy sheets of legal paper, the trust must be funded either with money or property. The trust should specify the amount of initial money or specify the property being titled to the trust and listed within the trust itself. A much sought after benefit of a trust is that the trustee, the person selected to handle the assets within the trust, is not required to appear before a judge to begin transferring the assets. Although the trustee does not have to swear an oath before a judge, unlike the executor of a will, a trustee does hold a significant legal burden in the form of duties imposed by law. A trustee cannot sell the trust’s assets to themselves or take any action that would not fully benefit the beneficiaries of the trust or the trust itself. If a trustee steps outside these duties, (i.e., acts in their own interest as opposed to the interest of the beneficiaries), then the beneficiaries or third parties who contracted with the Trust can intervene by lawsuit against the Trustee.
A trust can be combined with a will, or a set of wills for spouses, which allows assets not in the trust to be transitioned to the trust upon an individual’s death. These wills, known as “pour over wills,” fund the trust on your death and give you the flexibility of a trust as opposed to the probate process. The pour over wills still must be probated, but the process is simple when all the assets go to fund the trust, reducing the stress on your family and providing a smooth transition upon death. If you have titled assets like a house or a car, then you may want to consider a trust and pour over wills so that those assets do not go through probate, or worse, sit empty and unused for months or years. Without a trust or will an asset like a car or home could go unrepaired, uncared for, or unused while the court decides where those assets end up. Eventually a court may allow for upkeep to certain assets, but a hearing before the judge may take weeks or months to schedule meaning those assets could fall into disrepair and ruin.
3. Create Power of Attorney documents
A power of attorney allows for an individual, while they possess a sound mind, to designate certain responsibilities to a third party to make decisions on their behalf. Typically, individuals name their spouse first, but you may choose an adult child or trusted friend to serve as the designee.
There are two types of power of attorney in Texas for purposes of estate planning: medical power of attorney and durable (financial) power of attorney. Both of these documents are simple to fill out and should be included in every estate plan. Each document requires the individual to relinquish rights, medical or financial, to a designated individual who will act on their behalf. A medical power of attorney and a financial power of attorney can either be effective immediately, usually in the opinion of two or more doctors, or it can be conditional for a later time period. Unfortunately, medical emergencies happen, and many people do not have power of attorneys set up for themselves or their spouses. Individuals could get sick and be unresponsive and their spouse, or other family member, could not have access to their bank accounts or other needed information because a valid power of attorney was not in place. This scenario can be easily avoided by having you and your spouse execute a valid power of attorney.
4. Communicate Your Estate Plan & Regularly Review It
Whether you choose to have a will, a trust, or combination of the two, it is crucial that you communicate to all affected parties their role in your estate plan. Set everyone up for success by describing to your chosen executor, trustee, and beneficiaries what your goals are and how your estate plan will execute those goals. You do not have to give each beneficiary a monetary value for each item of your estate, but you can let them know generally what they would be receiving and how much that asset may grow. For your beneficiaries especially, it is important for them to be aware of the increased financial responsibility they will be receiving, particularly around taxes. Although the estate in total may not be taxed because it falls under the annual exemption amount (as of 2023, the exemption is $12.92 million per individual), each beneficiary under a will or trust who receives something of value will have that monetary value added to their current taxable income for the year. Beneficiaries should consult with their tax specialist upon learning of the exact monetary value of the gift they will be receiving and plan accordingly.
Finally, regularly review your estate plan with your attorney, executor and trustees, and beneficiaries. A consistent review every five years or so will allow for changes to be made or updates in the law to be applied to your documents to ensure there are no bumps in the road when it is time for the documents to be probated or administered. Open communication about your estate plan also keeps all parties involved in the loop, which more often than not will avoid contentious situations and costly lawsuits.
Wrapping up, taking the steps to talk about and plan for end-of-life scenarios are not always the most fun conversations and many people would rather avoid them; but keep your focus on the goal – ensuring that your family is taken care of and that your assets benefit those you care for instead of causing division and strife. Pastors have a unique role in their communities and are often viewed as leaders and standard bearers for the priorities of God and for the good of those around them. Pastors may feel hesitant to worry about earthly things that will pass away and that could not be truer in light of eternity, but while a pastor may move into eternity, they will still leave behind loved ones and people who they care about. Properly establishing an estate plan is a parting act of love as it reduces the financial stress and burden that comes with a loved one’s passing and places the focus and attention on what matters – people.
For more information on estate planning for pastors, contact us through our website at www.thenonprofitteam.com.
