5 Texas Estate Planning Mistakes That Can Create Expensive Problems

Quick answer: Some of the costliest estate-planning problems do not come from having no plan at all. They come from shortcuts that seem reasonable at the time—adding a child to a deed, relying on beneficiary forms without coordinating them, transferring property because of Medicaid fears, leaving assets outright to a beneficiary with disabilities, or letting an old plan become obsolete.

Most of these problems are easier to prevent than to fix.

Mistake #1: Adding a Child to the Deed of Your Home

Parents sometimes add an adult child to a home deed because they want to avoid probate.

The problem is that a deed may give the child a present ownership interest, not merely the right to receive the home later.

That can create issues involving:

• loss of parental control;
• future sales or refinancing;
• the child’s creditors or financial problems;
• family expectations;
• gift and tax consequences;
• long-term-care planning.

Tax basis deserves particular attention. Federal tax rules generally treat gifted property differently from inherited property. A recipient of gifted property may take a basis tied to the donor’s basis, while inherited property generally receives a basis determined under the rules applicable at death.

So a deed change intended merely to avoid probate can create consequences far beyond probate.

Better options may exist

Depending on the situation, alternatives may include:

• Transfer on Death Deed;
• Lady Bird Deed;
• revocable living trust;
• another coordinated ownership plan.

Texas specifically authorizes Transfer on Death Deeds. A properly executed and recorded TOD deed transfers the owner’s interest at death without giving the beneficiary the same present ownership interest during the owner’s lifetime.

Related article: Should You Add Your Child to the Deed of Your Texas Home?

Mistake #2: Treating Beneficiary Designations
as a Complete Estate Plan

Payable-on-death and other beneficiary arrangements can be very useful.

But they are not substitutes for coordinated estate planning.

Problems arise when:

• one child is named on an account while the will divides the estate equally;
• a contingent beneficiary was never named;
• a beneficiary has died;
• a minor is named directly;
• a new trust was created but the beneficiary forms were never changed;
• different accounts point in different directions.

The issue is not that beneficiary designations are bad.

The issue is that they may control assets outside the will.

That means the family may read the will after death and discover that one of the largest assets is passing under completely different instructions.

Better approach

For each major asset, ask:

“How does this asset actually pass at death?”

Then coordinate that answer with the rest of the estate plan.

Related article: Beneficiary Designations Can Override Your Will.

Mistake #3: Giving Property Away Because You Are Afraid of Nursing-Home Costs

Families sometimes hear:

“If you ever go into a nursing home, Medicaid will take your house.”

That is an oversimplification.

Texas Medicaid eligibility and Texas Medicaid Estate Recovery—MERP—are separate issues.

Texas HHSC explains that MERP may seek recovery from the estate of certain deceased Medicaid recipients who were age 55 or older when they received specified long-term-care services and initially applied for those services on or after March 1, 2005.

MERP is not part of the Medicaid eligibility determination itself.

So panic transfers can be especially dangerous.

Giving away a home or other assets may create problems involving:

• Medicaid transfer rules;
• loss of control;
• the recipient’s creditors;
• tax consequences;
• family disputes;
• future housing security.

The right response to long-term-care concerns is not automatically:

“Put everything in the children’s names.”

It is:

“Understand the rules before transferring anything.”

Related article: Long-Term Care Planning in Texas.

Mistake #4: Leaving Money Directly
to a Loved One with Disabilities

A direct inheritance can create problems for someone who receives means-tested benefits such as SSI.

SSI eligibility depends in part on income and resources, and trust treatment depends on the type of trust and how it is structured. SSA expressly recognizes special-needs and pooled-trust exceptions under federal law, but the rules are technical and trust distributions can still affect benefits.

This is why simply naming a beneficiary with disabilities directly on:

• a will;
• life insurance;
• retirement account;
• payable-on-death account;

may undermine otherwise careful planning.

Better approach

A properly designed Special Needs Trust may allow funds to be managed for the beneficiary without simply giving the beneficiary outright ownership.

The right structure depends heavily on whose money funds the trust and what benefits the beneficiary receives.

Related article: What Is a Special Needs Trust in Texas?

Mistake #5: Having an Estate Plan
That No Longer Matches Your Life

Estate planning is not finished merely because documents were signed once.

An old plan may contain:

• a deceased executor;
• the wrong beneficiaries;
• an ex-spouse;
• outdated powers of attorney;
• old beneficiary forms;
• property you no longer own;
• no provision for a new spouse;
• no planning for grandchildren;
• no response to a beneficiary’s disability or financial problems.

And if there is no valid will at all, Texas intestacy law determines who receives probate property. Texas Estates Code Chapter 201 provides those default inheritance rules.

The result may be perfectly lawful and still very different from what the person expected.

When Should an Estate Plan Be Reviewed?

A review is especially worthwhile after:

• marriage or remarriage;
• divorce;
• birth or adoption;
• death of a spouse, beneficiary, executor, or agent;
• major asset changes;
• retirement;
• relocation to Texas;
• creation of a trust;
• disability or special-needs concerns;
• significant changes in family relationships.

You do not necessarily need new documents after every change.

You do need to know whether the existing plan still works.

The Hidden Cost Is Often More Than Legal Fees

Estate-planning mistakes can create costs that are difficult to measure.

They may result in:

• additional probate work;
• title problems;
• tax consequences;
• benefit problems;
• delayed access to property;
• family disputes;
• loss of privacy;
• unnecessary court involvement.

Sometimes the legal fix itself is straightforward.

What cannot always be repaired is the conflict or loss of flexibility created before anyone realized there was a problem.

Five Questions to Ask About Your Own Plan

1. Have I added anyone to property or accounts merely for convenience?
2. Do my beneficiary designations actually match my will or trust?
3. Have I made transfers based on assumptions about Medicaid or nursing-home costs?
4. Does anyone receiving an inheritance have disability, creditor, addiction, or money-management concerns?
5. Has anything important changed since my estate plan was signed?

If any answer makes you hesitate, the plan deserves another look.

The Better Question

Do not ask only:

“Do I have estate-planning documents?”

Ask:

“Do my documents, deeds, accounts, beneficiary designations, family circumstances, and long-term-care planning actually work together?”

That is the difference between simply owning estate-planning documents and having a coordinated estate plan.

Ready to Review Your Estate Plan?

If you want to identify mistakes before they become problems for your family, you can schedule a private consultation to review your documents, beneficiary designations, property ownership, and family circumstances.

If you would rather begin by organizing your information, the Texas Probate Risk Workbook can help identify issues to review.