What is Estate Planning?
"Estate Planning" is a broad concept that encompasses concepts of financial and family planning for you and your family. It is lifetime planning that includes caring for the needs of your minor children to the issues faced later in life by the elderly and everything in between. Some of the areas of law include planning for disability (yours, your children, parents), estate and income tax planning, protecting the assets you acquired through years of hard work, making gifts to family and much more. Below is a list of only some of the planning techniques that may be implemented to accomplish your goals:
1. Last Will & Testament;
2. Financial Power of Attorney;
3. Medical Power of Attorney;
4. Revocable Living Trusts;
5. Estate Tax Planning for larger estates;
6. Irrevocable Trusts;
7. Planning with Life Insurance; and
8. Retirement Planning;
In addition to some of the more typical estate planning and financial planning techniques enumerated above, there are numerous other considerations, planning techniques and individual circumstances to consider in crafting an estate and financial plan. Every person's circumstances are different and should be examined with experienced legal counsel to determine the best course of action.
What are Louisiana Probate and Succession Proceedings?
In layman's terms, Estate Probate is the court procedure whereby a testament (Last Will) is authenticated, filed and ordered executed. Probate procedure involves a Last Will. Louisiana Succession procedure is the broader proceeding involving the transmission of property of the estate to the heirs or legatees. A Louisiana succession takes place whether there is or is not a Last Will. Many people in Louisiana use the terms as synonymous, although they are not. If a person dies without a Last Will, then the succession is "intestate", whereas it is considered a "testate succession" where a Will is being submitted for probate.
Louisiana has many concepts that are either in the minority or do not exist in other states, for example, community property, forced heirship and usufruct.
LOUISIANA COMMUNITY PROPERTY LAWS AFFECTING ESTATE PLANNING
The laws of the individual states vary with regard to property ownership, inheritance rights and techniques available to leave property to your heirs at death. Louisiana has a number of concepts that are unique and that are not found in other states. As an example, the term "usufruct" is used herein. Very generally this is a right of use and enjoyment over property and the right to receive all income therefrom. Another person would "own" the property, subject to this right of usufruct. This type of fragmented ownership does not exist in other states. Forced heirship is also a concept unique to Louisiana. These are but two examples of how Louisiana's laws differ from other states. Louisiana also has a system of ownership between married persons known as "community property." Not all property owned by a married couple is classified as community property as we will see below.
PROPERTY OWNERSHIP CLASSIFICATIONS
The form of ownership of property impacts estate and retirement planning. In Louisiana the basic forms of ownership are separate property and community property. If you are not married, then all property which you own is separate property. The community ownership classification should not be confused with status as a co-owner or owner in in-division. For example, you may own an undivided one-half (1/2) interest in a piece of real estate with another person, such as another family member. This typically happens where you inherited property from family. Although you do not have full ownership in the entire piece of real estate, you do have separate ownership over your undivided one-half (1/2) interest. Forms of ownership in other states such as "tenancy in common with right of survivorship" and "tenancy by the entirety" are not recognized in Louisiana.
If you are domiciled in this state and married, Louisiana's Community Property Regime would apply, unless excluded or modified by agreement. But of course, a married person may also own separate property. If you and your spouse have community property, each of you own a present undivided one-half (1/2) interest in the specific asset.
The ability of each spouse to sell, lease or mortgage community property depends upon the type of property. In some cases, one spouse can manage or dispose of community property, whereas in other cases the concurrence of both may be necessary. For example, both spouses must concur to alienate, mortgage or lease community real estate such as their home. On the other hand, a spouse has the sole right to alienate, mortgage or lease a movable registered in his or her name, e.g. a car registered in your name. Below is an overview of what is included in community and separate property classifications.
Separate property includes, but is not limited to, the following:
- Property acquired prior to marriage.
- Property classified as separate property under a valid marriage contract.
- Inheritances or donations made to a spouse individually.
Everything not classified as separate property is classified as community. There are a few less common separate property classifications which have not been listed herein. If you find yourself in a situation where classification is important, seek competent legal advice to make this determination.
The community classification is very broad, and as indicated above, it generally includes all property not classified as separate. It specifically includes the following:
- All property acquired during the marriage is generally presumed to be community. Proof that such is not the case could be given. This is a very important presumption and it places the burden upon the person alleging to the contrary.
- Property donated to the spouses jointly would usually be classified as community property.
- Income from separate property is usually classified as community income unless a declaration reserving this income as separate is properly executed and filed. This item sometimes comes a surprise to people who own a substantial amount of separate property.
- All property not classified as separate property.
The community property classification is broad and encompasses even ownership of qualified plan benefits accrued during marriage. However, federal law significantly affects recognition of these rights to the non-employee spouse. The interrelationship between federal and state law for this type of asset is at best confusing and requires close scrutiny on a case by case basis. Even life insurance acquired during marriage may be so classified, but the rules on classification of life insurance are somewhat different and this asset is more difficult to classify. There are some exceptions, but the general rule is community ownership. Beneficiary designations will also be of utmost importance and must be examined in crafting an estate plan.
Property ownership classification is important in several contexts, including divorce, estate planning and succession proceedings.
INHERITANCE RIGHTS WITHOUT A WILL
Once a determination is made as to what is included in your estate you need to examine how the State of Louisiana will distribute your property if you do not write a testament or otherwise validly dispose of your property in some other manner. When you have not written a Last Will, the succession is considered "intestate". If you have written a Will, your succession is "testate".
The following discussion concerns how your separate property would be distributed in an intestate succession, i.e., without a Last Will. Below that is a discussion about community property inheritance rights in intestate succession.
Separate Property Inheritance Rights
The order of inheritance of separate property provides for each classification of heirs to inherit to the exclusion of all others. The rules for separate property are as follows. If you die with descendants, then they will inherit all separate property to the exclusion of all others. If you do not have any descendants, then your separate property (even if you are married) will be inherited by your siblings (or their children i.e. your nieces and nephews if the sibling predeceased you), subject to a usufruct in favor of the decedent's surviving parent or parents. If you have no surviving parents, then your siblings or their child or children by representation would inherit in full ownership. This order of inheritance is to the exclusion of any rights in the surviving spouse.
Undivided Ownership of Property
It must be born in mind that each of your heirs will receive an undivided ownership in the same piece of property. This can often lead to family problems and you should consider whether your testament should provide for a different distribution. For example, perhaps stock in a closely held family business should be left in a will to the child that helped to make the business a success and different assets left to your other child or children. Alternatively, a corporate stock purchase agreement (Buy-Sell Agreement) could also accomplish this goal.
Surviving Spouse Inheritance Rights (lack thereof) in Louisiana Separate Property
The most striking realization is that where separate property is involved your spouse has absolutely no rights in the property or any of it's income, unless you have no children, grandchildren, brothers, sisters, nieces, nephews or parents surviving. This can sometimes cause an unfortunate and unanticipated result. Of course, this method of distribution by the state is used where you have not written a Last Will to provide a different distribution method. Depending upon the application of forced heirship, often a substantial amount of flexibility is available in crafting an estate plan.
Louisiana Community Property Inheritance Rights
We will now examine how the State of Louisiana would distribute your undivided one-half(1/2) share of community property in the absence of a testament, which would be as follows:
If you die with descendants your surviving spouse would inherit a usufruct (right to use, enjoyment and income) over your share community property, which would terminate upon the earlier of death or remarriage. There are several important points to consider here. First, is it your desire that the usufruct terminate upon remarriage or would you like your spouse to have these rights for life? Second, in a second or third marriage situation where the survivor is not the mother or father of your children, he or she would still have this usufruct. This can often create tension between your children and your spouse. Third, in this situation the children would have the right to demand that your spouse put up security for the usufruct. This can create additional tension in their relationship, but if the children do not take advantage of the right to demand security, then their right to ultimately receive the property may suffer. Fourth, the Louisiana usufruct (unless confirmed for life) does not qualify for the federal marital deduction, discussed in later chapters on the federal estate tax. This failure to qualify for the marital deduction could result in unnecessary federal estate tax liability. All of the above can be changed in your Last Will or Testament to provide as you desire. For example, the usufruct to the surviving spouse could be confirmed for life. This lifetime usufruct may qualify for the federal martial deduction and will protect the surviving spouse.
Numerous other possibilities exist for planning in a Will. Personal preference and tax ramifications must be examined prior to a decision being made. For example, if forced heirship has no application, you may leave all property to the surviving spouse. Doing so could have adverse tax consequences under some circumstances, but this is usually the case only in large estates. As with all planning, each individual situation must be examined prior to making a decision. Only then can an informed decision be made.
Minors and the Infirm
A very important aspect of Louisiana's inheritance laws is the receipt of property by minors and physically or mentally handicapped persons. Because of their legal incapacity, these persons may not be able to represent themselves and a tutor or curator will have to be appointed for this purpose. Often, this is a costly and cumbersome proceeding which requires court intervention. Court intervention and its associated costs can be avoided or diminished by the establishment of a trust on behalf of the child or incompetent person. Such a trust could be a testamentary trust established in a Will or a trust created during lifetime. In any event, a trustee would manage the trust property without the problems of court delays, court approvals of the trustees actions and the associated costs could be avoided or reduced.
Establishment of such trusts are highly recommended under the appropriate circumstances. It is common in Wills to have certain pieces of property left to certain specified individuals such as family members or friends. This can sometimes avoid disputes between family members or accomplish other goals such as passing on a family business to those that have worked to help build it. Special circumstances may also make it desirable or even necessary to leave a greater amount of property to one person or another, for example an incapacitated child. All of this can usually be accomplished by a property drafted Last Will & Testament.
Assets usually not controlled in your Last Will
Certain assets are not controlled by Louisiana's method of distribution. The most typical are life insurance, qualified retirement plan proceeds and IRAs. The beneficiary designations which you execute will usually control their disposition. As with most legal matters, each individual situation must be examined to make these types of determinations.
What is Forced Heirship:
Louisiana is the only state in the United States that has the institution of forced heirship. In the past, Louisiana law provided that all children (and descendants of a predeceased child) were classified as forced heirs. The new laws provide much more testamentary freedom (to leave your property to others) by restricting the persons that will be classified as forced heirs. A portion of the estate referred to as the "disposable portion" is not subject to the claims of forced heirs. If there are no forced heirs, then testamentary freedom is available over the entire estate. If there is one forced heir, the disposable portion is 3/4ths of the estate. With two or more forced heirs, the disposable portion is one-half of the estate.
There are now only two major categories of forced heirs, being 1) children under 24 years old and 2) certain disabled children regardless of age. There is a sub-category of forced heir where your child has predeceased you making classifying children of the predeceased child (decedent's grandchildren) forced heirs.
If at the time of your death a predeceased child would have been under 24 years of age, your grandchildren (children of the predeceased child), if any, would be classified as forced heirs of your succession at your death. A disabled child of a predeceased child may also be so classified. As these rules are complex, always check with a licensed Louisiana Estate Planning Lawyer when in doubt.
What share is a forced heir entitled to? The share received by a forced heir is one-fourth (1/4) if there is one forced heir and one-half (1/2) if there are two or more forced heirs. See the discussion above on the disposable portion. If the forced heir is entitled to a forced share which is larger than his intestate (without a Will) share, then the smaller intestate share is the forced portion. This rule would apply where there are more than 4 forced heirs. The forced share may be burdened by a usufruct (in layman's terms, a right of use and right to income) in favor of the surviving spouse. This provides a planning opportunity for married couples with young children or others classifed as forced heirs.
If you do have forced heirs and the forced heir is not given the portion or quantum of the estate to which he or she is entitled, the forced heir can reduce the amount of other donations to obtain the forced portion. Example: Father (F) has five children from a prior marriage being Cl, C2, C3, C4 and C5. Cl is 32 years old and is a successful physician. C2 is 30 years old and suffers severe mental retardation. C3 is 29 years old and although he has full legal capacity he is unskilled for any gainful employment. C4 is predeceased, having died in an automobile accident at age 27. C4 was married, but her spouse was also killed in the accident and they left a daughter (GD) (F's granddaughter), who is a minor. C5 is 22 years old and is a senior in chemical engineering. Under current law, Cl, C3 and C4 will not be classified as forced heirs. Nor will C5's daughter (F's granddaughter), even though she would have been so classified under old law and although she may suffer severe financial hardship. C2 and C5 will be classified as forced heirs, although C5 may be self-sufficient with a bright future, whereas C2 likely requires financial assistance. Clearly, hardship and inequity can result in many situations as indicated by this example. Note:
In calculating the amount of the forced portion, some very important assets are not considered. An important item not considered is premiums paid for insurance on the life of the donor and proceeds from such life insurance payable to a beneficiary other than the estate. Also excluded will be employer and employee contributions and benefits payable by reason of death, disability, retirement and termination of employment under Individual Retirement Accounts or Annuities (IRA's) or Qualified Retirement Plans, such as Pension and Profit Sharing Plans. A similar rule exists for deferred compensation plans for a public or government employer. However, the proceeds from life insurance, qualified plans and IRA's can be used to satisfy the forced portion.
Every family and factual situation is unique and competent legal advice should be sought when these types of issues arise.