Chapter 8: Wills.
A will is the legal expression or declaration of an individual's wishes as to the disposition of his property after death. Revocable during the individual's lifetime, a will is not operative until death and is applicable to the situation as it exists at the testator's death.
WHEN IS THE USE OF SUCH A DEVICE INDICATED?
1. The most important reason for creating a will is to provide the testator (in some jurisdictions, "testatrix" is the feminine form; either form means the one who makes or executes the "will and testament") with an opportunity to control the passing of his or her property and thereby to avoid "intestacy." Without a will the decedent's assets will pass by the laws of intestate succession of the state in which the decedent resides or in which his property is located.
The principle of the intestate succession laws is to distribute the decedent's property as the government believes the decedent would have wanted had a will been executed.
Typically, the rules for distribution of separate property are as follows:
A. Should the decedent die intestate with a spouse but no children, the spouse takes the entire estate.
B. If a spouse and children survive, each takes some portion of the estate.
C. If only the decedent's children survive, they take the entire estate.
D. If no spouse or children survive, the estate goes to the decedent's parents, and if they do not survive, then to the decedent's siblings or their heirs.
E. The next level of intestate takers is the decedent's grandparents and their heirs (the aunts, uncles, and cousins of decedent).
F. If none of the decedent's heirs survive, the next takers are the issue of the decedent's pre-deceased spouse.
G. If none of the above survive, the estate goes to the next of kin.
H. The state is the final taker.
While the rules above are typical, the laws in a particular state may have some variation. The above rules generally apply in the ten community property states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) as to separate property; but if the property is held as community property, even where there are children, all community property goes to the surviving spouse in the absence of a will.
Louisiana has unique rules that limit what a decedent may do with property, in some circumstances forcing the transfer of property to a certain person (usually the surviving spouse) regardless of the terms of the will.
Be certain to remember that real property in a particular state is subject to the rules of that state. Therefore, for example, a will dealing with oil interests or other interests in land located in Louisiana is subject to the laws of Louisiana, even though the testator is a resident of New Jersey.
2. As described above, without a valid will the decedent's property goes to his or her relatives as provided by statute. By making a will, a person can pass property in a different manner than that provided by statute. With a will, property generally can be left to one or more relatives, of any degree, or friends or charities to the exclusion of others.
However, many states have laws that require the spouse and/or children to take some share of the estate. Property can be willed to non-relatives such as friends or charities, subject to rules in certain states that require some rights to pass to the spouse or children.
3. In a will, the testator can name the "personal representative" of the estate. A person or institution can be named to act as executor (in some states, "executrix" is used as a feminine form) and be appointed to carry out the directions in the will and to dispose of the property according to the testamentary provisions.
The named personal representative may often be a relative or close friend. But, if the estate is large or complicated, the testator should consider appointing either a professional or an institution accustomed to dealing with assets and with the sometimes complicated rules of probate.
The will may provide that the executor need not be bonded, which can save money for the estate, but which gives up some protection. If there is no valid will or if no executor is named or if the named executor for any reason fails to qualify or ceases to act, the court will appoint an "administrator" (in some states, "administratrix" is used as a feminine form) to administer the estate.
4. A will can set out the terms of a trust in which the named trustee can manage assets on behalf of the beneficiaries for many years after the death of the testator. This may be especially appropriate in order to manage assets for the benefit of the testator's minor children. Such a trust is referred to as a "testamentary" trust since it is created through the decedent's last will and testament and comes into being at the probate of the will.
The terms of a testamentary trust are very important. Sometimes people have such trusts terminate when a child reaches age 18 or 21. Such an early distribution, at a time before the child has had the experience of handling large sums of money, often results in the child's not going to college and also losing all of the inheritance.
5. When there are minor children, the will can nominate a guardian of both the "person" and the "estate" of each child. A "guardian of the person" generally provides for the custody and care of the child. A "guardian of the estate" manages the child's assets. State laws generally require a court to give significant weight to such a nomination by a parent who has custody of a child. Without such a provision, the
court names the guardian upon the death of the parent(s) based on available information and often depending on who volunteers.
6. A will allows the testator to make alternative provisions in case some of the heirs predecease him or her. For instance, if a child dies, the testator may want to leave that share to the child's siblings, or perhaps to the child's issue.
7. Some types of property are not affected by the provisions in a will. Assets held in joint tenancy or tenancy by the entirety pass by right of survivorship to the remaining joint tenant(s). Policies of life insurance, IRAs, and certain other assets pass by contract to the person(s) named in beneficiary designations.
8. Even where an individual has a living trust which holds most of the individual's assets in order to avoid probate, it is still very important to have a will which will "pour over" into the previously established trust any assets which were not already transferred to the trust.
9. The majority of states provide that if a spouse or child is not named in a will, such a person is deemed to be a "pretermitted heir." Regardless of what the will says, such person will take the share of the estate that would be given to that person under the state's rules of intestacy. Thus, it is wise to mention all such persons in the will so that they cannot claim to be pretermitted heirs left out of the will only because they were overlooked by the testator.
10. A will affords the testator the opportunity to minimize estate taxes (discussed below) and other transfer costs and provide who is to bear the burden of such costs.
WHAT ARE THE REQUIREMENTS?
1. The general rule is that any person 18 or more years of age who is of sound mind may make a will.1 While this is the general rule, a few states have a different minimum age requirement.
2. The law ordinarily requires less mental capacity to make a will than to make a contract. An individual can make a will even if sick, elderly, weak, or of low mental capacity. In general, most states require that the testator know (1) the nature and extent of his property and (2) the natural objects of his bounty.
3. Except where a "holographic will" (one written entirely in the testator's handwriting) or an oral ("nuncupative") will is allowed, wills must meet certain legal requirements. Typically, an attested will must be in writing, signed by the testator (or in the testator's name by some other person in the testator's presence and at his direction), and must be witnessed by at least two persons. (2) Some states still require three witnesses while at least one, Pennsylvania, requires no witnesses at the time the will is signed.
4. Approximately half of the states recognize a holographic or handwritten will. (3) A will which is not effective under other provisions may be effective as a holographic will, whether or not witnessed, if it is dated and the signature and the material provisions are in the handwriting of the testator. (4) In some states, having printed or typed material on the holographic will can invalidate it.
5. Less than half of the states recognize oral (nuncupative) wills. This is a will declared or dictated by the testator during the last illness, before a sufficient number of witnesses, and later reduced to writing. In some states such wills are valid only under certain circumstances. For instance, they may be valid only to transfer a limited amount of personal property. (5)
HOW DOES ONE CHOOSE THE TERMS OF A WILL?
John Lee is preparing for his retirement and has decided to "get his affairs in order." He knows that without a will, his spouse and his children will each receive a portion of his estate. Since John's wife is a wealthy woman in her own right, as the recipient of the estate of her parents, John would rather leave his assets to the children. The children are not experienced in dealing with assets and his wife deals well with assets.
John has three children. The youngest has been estranged from the family for many years. John makes a will leaving all of his assets in a trust for the benefit of his two other children, one-half to each. He names his eldest child as executor of the estate and the second child as the successor executor. John's wife was named as the trustee of the trust for the two older children.
John realizes that certain of his assets, his life insurance and his IRA account, will not pass by his will. He has named his two eldest children as equal beneficiaries of those assets. To avoid his wife and estranged child taking intestate shares as pretermitted heirs, his will names them but leaves nothing to them.
John has made his decisions on the basis of need and degree of positive feelings he has for each beneficiary. His exclusion of his wife does not indicate a lack of feeling for her (a fact he may wish to communicate in the will) but a recognition that she does not need his assets for her security and also that adding more to her estate would increase the share which would ultimately be paid in death taxes.
By leaving the funds for the two older children in trust with his wife as trustee, he has provided good management to protect the trust assets for the children. The trust terms also provide John's wife with latitude as to the distribution of the assets as between the children and how and when they will receive the assets. Thus, John has not deprived his wife of some continuing parental control.
Although some people would "always leave things equally to the children," John has recognized the estrangement of the one child and has made the difficult but perhaps logical decision to leave the assets to the children who are still close to the family. In making such decisions, there is simply no "right way" that can always be applied to distributing assets; the decisions must be made on the basis of what is important to each testator and the circumstances of the persons and organizations he wishes to benefit.
HOW IS A WILL CHANGED OR REVOKED?
A will may be changed by writing a separate document which is not intended to be a new will but which is meant to change a provision of an existing will. Such a document is called a "codicil."
A new will, to the extent that it does not state that it is revoking all prior wills, may often merely change the terms of an existing will. In other words, the unrevoked prior will(s) remain valid to the extent not inconsistent with a later will. For this reason, it is good practice to make clear in a will that it is intended to revoke all prior wills, if that is the testator's goal.
Generally, a codicil must be signed with the same formalities as a will in order to be valid.
Revocation of a will also may occur by destroying a will or defacing it with the intent to revoke. Sometimes the issue of the testator's intent (e.g., if the will is burned together with other papers or trash, was there an intention to revoke the will?) will result in expensive litigation. A specific statement of revocation in a new will (or writing "Revoked" across an old will and signing and dating that revocation) often may achieve the testator's goals more effectively.
Certain circumstances will cause the revocation of a will without any action on the part of the testator. Examples of this include revocation by marriage and revocation by divorce. Particular state law must be checked.
WHAT ARE THE DEATH TAX IMPLICATIONS?
At death, federal estate taxes are imposed on property that is transferred to the beneficiaries. However, each U.S. resident has a unified credit that eliminates the estate tax on the first $2,000,000 (in 2006, increasing to $3,500,000 in 2009) in estate assets. EGTRRA 2001 repeals the estate tax for one year in 2010. The unified credit exemption equivalent (or applicable exclusion amount) returns to $1,000,000 after 2010.
Most states have abolished their state death taxes in favor of a "credit estate tax," i.e., an estate tax sufficient to absorb the credit formerly allowed against the federal estate tax for state death taxes actually paid. However, since the federal credit was repealed in favor of a state death tax deduction effective as of 2005, a number of those states have enacted death taxes of their own, mostly based on the former federal credit, and others have retained their former death tax laws. In such states, a death tax may be due even though there is no federal estate tax to pay.
If the decedent's assets are valued in excess of the unified credit exemption equivalent above, federal estate tax (discussed in Chapter 15) will be owed unless a deduction can be taken. The most common deductions are the marital deduction (discussed in Chapter 24, Trust-Marital Deduction and Bypass) and the charitable deduction (discussed in Chapter 32, Charitable Contributions).
Other deductions generally available include the following:
A. Debts of the decedent;
B. Administration expenses;
C. Casualty losses to estate assets;
D. Funeral expenses; and
E. State death taxes.
The family-owned business deduction (see Chapter 42) is repealed for 2004 to 2010.
If a married individual wishes to minimize taxes at his death, he should be certain to have a will that provides for all assets in excess of the unified credit exemption equivalent above to pass to his spouse or to a trust for the benefit of the spouse, so a marital deduction can be taken for those assets. The taxable estate will thus be reduced to the value that can be "sheltered" by the decedent's unified credit. Absent such planning, if all of the assets are left to a spouse, there will be a 100% marital deduction and no assets will be available to take advantage of the unified credit (which is a "use it or lose it" benefit). The result will be that all of the assets will be taxed at the death of the surviving spouse and the unified credit of the first-to-die spouse will be wasted. This is reviewed in more detail in Chapter 24, relating to the marital deduction.
Generally, unless the will provides otherwise, estate taxes are apportioned among all beneficiaries of the estate (although in a few states death taxes are paid from the residue). (6) Alternatively, the testator may want to provide that taxes should be paid from the residue (assets not specifically disposed of elsewhere in the will) so that the recipients of specific gifts will not be responsible for the tax on the gift(s) they receive.
For example, if the will provides for taxes to be paid from the residue, Susie, the distributee of the decedent's Rolls Royce, will not have to make an out of pocket payment for her share of estate taxes, providing that there are sufficient assets in the estate residue to pay such taxes.
WHAT ARE THE INCOME TAX IMPLICATIONS?
For income tax purposes a probate estate is a separate taxable entity. A federal fiduciary income tax return (Form 1041), and often a state income tax return, must be filed annually during the period of administration if sufficient income ($600 or more for the federal return) is received during a 12 month period, or if the trust has a beneficiary who is a non-resident alien.
No income tax is recognized solely as the result of a death. As a matter of fact, there may be a tax benefit at death, since most of the assets in the decedent's gross estate receive a new income tax basis equal to the fair market value of each asset at the time of the decedent's death. Assuming the asset increased in value or is worth more than its basis in the decedent's hands during lifetime, it receives a "step-up" in basis. The taxable gain inherent in the asset disappears. Thus, an asset could be sold immediately after death and there would be no income tax to pay. For example, assume, 20 years before his death, a client purchased stock for $20 a share. If it was valued in his estate at $80 a share, that $80 would become the new basis for purposes of determining gain if his beneficiary sold it. If the stock were worth less than its basis, the basis would be stepped down.
One exception to this rule is any asset that would have been taxed as income had the decedent lived long enough to receive it. Unpaid fees due to a doctor or lawyer who reports his income on a cash basis, or notes resulting from the sale of property reported on the installment method would be examples of these. These assets are generally termed "income in respect of decedent" and they retain whatever income tax basis the testator had in them.
For decedents dying in 2010, along with repeal of the estate tax for one year, a modified carryover basis regime replaces the step-up in basis, (i.e., a step-up in basis is allowed, but only on the value of the estate below specified levels).
ISSUES AND IMPLICATIONS IN COMMUNITY PROPERTY STATES
Assets held as community property are owned equally by the spouses. At death, each spouse has testamentary power of distribution over his half of the community assets. Thus there is no certainty that the survivor will receive the decedent's one-half share of the community assets, but the absence of a will generally will produce that result. (7)
In common law (non-community property) states, the surviving spouse may sometimes be protected against disinheritance through laws of forced shares, dower, or curtesy.
In a community property state, the will of the deceased spouse may affect the survivor's half of the community property. For example, the decedent's will may purport to give all of the community property assets (the shares of both husband and wife) to a trust for the benefit of the surviving spouse and the children. If so, the survivor must elect whether to take under the will (thus assenting to the decedent's disposition of the survivor's one-half community property interest) or to take his one-half of the community property outright (denying the decedent's power to dispose of the survivor's community property interest).
QUESTIONS AND ANSWERS
Question--All of the client's assets are held in joint tenancy or in a manner in which a beneficiary is designated (e.g., IRAs). Does the client need a will?
Answer--While the assets currently owned by the client will pass to the survivors or beneficiaries without probate, at some time the client may acquire additional assets that are titled in another manner. Also, the named joint tenant(s) or beneficiary(ies) might predecease the client. A will is always valuable to prevent intestacy.
Question--Is it difficult to change a will as circumstances change?
Answer--A will can be amended or revoked at any time during the lifetime of the testator. It is possible to revoke a will in full and to create a new will, or to revoke only a portion of the will and add new provisions by means of a codicil. The will itself can provide for changing circumstances by making provisions for successor beneficiaries and/or executors in the event of the death of any named beneficiaries and/or executors.
Question--When should a will be updated?
Answer--Generally, a will should be reviewed at more or less regular intervals. Most specifically a will should be reviewed:
(1) When there are significant changes in the value of property that is intended to be distributed.
(2) Where the testator has moved from one state to another.
(3) Where there have been changes in family circumstances such as births, deaths, marriages, divorces.
(4) Where the personal representative, guardian or trustee can no longer serve as originally expected.
(5) Where federal or state tax laws change.
(6) Where changes in business ventures occur.
(7) Where disposition or other objectives change.
This list is not all encompassing but is representative of some of the major changes to cause a will review and possible change.
Question--Can the imposition of estate taxes at death be avoided by having assets pass outside the will?
Answer--The gross estate includes all assets owned by the decedent at death. This includes assets held in the decedent's name, assets transferred to a revocable trust by the decedent, the decedent's interest in joint tenancy assets, proceeds of life insurance from policies owned by the decedent, and the value of most retirement plans (IRAs, for example). Even assets outside the United States are subject to federal estate tax for a U.S. citizen. Unless a will employs tax avoidance devices such as the marital or charitable deductions, the will really has no effect on the amount of estate tax that is owed.
However, some state death taxes are inheritance taxes, which vary the amount of deduction and tax rate based upon the relationship of the recipient to the testator. To the extent that the will provides a different distribution of property than would an intestacy, the amount of inheritance tax to be paid may be changed. The other form of death tax, called an estate tax, is a tax based in general on the total value of the assets in the estate, rather than how much is inherited by each person and the relationship of that person to the testator. Two areas where even estate taxes are affected by who is the recipient of a bequest or devise include gifts made to spouses (which may result in a marital deduction) and transfers to charities (which may qualify for a charitable deduction).
Question--Does a client with a modest estate need a will?
Answer--There are many reasons almost every adult should have a will. Even though an estate is modest, it can be important to name a guardian for both the person and the estate of the client's children. A client may have very strong feelings that a close friend is the best person to care for the children and if those wishes are not expressed, the children may end up in the custody of relatives or others who would not have been chosen to deal with the children and/or their assets. In some cases, a client may wish to leave the personal custody of a child to one person and leave the management of the child's assets to another.
Question--Suppose a client planned to avoid probate by putting assets in a revocable intervivos trust (a "living trust"). Can the client change the disposition of assets in the trust by changing his will?
Answer--As long as the client has actually placed the assets in the intervivos trust, his will will not have any effect on these assets unless the trust provides for amendment or exercise of a power of appointment to be made by a will. When a living trust is used, generally the will is only a "pour-over will" which directs to the trust any assets not already placed in the trust. The revocable trust can be changed by a written amendment in the form set out in the trust for such changes.
In order to avoid the question of whether the trust terms are to be changed or a power of appointment exercised inadvertently by a will, the majority of planners provide that changes in a trust can be made only by an instrument in writing other than a will.
Question--Can probate be avoided through an inter-vivos trust?
Answer--Yes, but only if the title of assets has been transferred from the client's name to that of the trustee of the trust. Failure to make the transfers will leave assets subject to a will and subject to the costs and delays of going through a probate in order to get into the trust.
Question--Is it expensive to have assets subject to probate?
Answer--Probate fees vary from state to state. In some states, they can be as high as a flat 5% of all probate property--plus additional fees for "extraordinary work" (preparing tax returns, some sales of property, fighting will contests, etc.). Both the executor and the attorney for the estate are entitled to a fee for their services.
Question--Assume a trust is desired to protect a client's children. Will it cost more to use a testamentary trust included as part of his will or more if an "intervivos trust" is used as a separate instrument?
Answer--There are at least three cost aspects to consider. One is the cost of going through probate, which is required for a testamentary trust but which can be avoided if assets are transferred before death to an intervivos trust. A different aspect is that some states require regular accounting to be made to the court by testamentary trusts, giving possibly better supervision but resulting in added attorney fees and court costs for each accounting. Lastly, the legal fees for drafting an intervivos trust may be greater since its use requires two documents (the trust and a "pour-over" will) and often some documentation to transfer title of assets.
Question--Is there any benefit to having property go through probate as opposed to having assets transferred to an intervivos trust prior to death?
Answer--Going through probate involves stricter supervision of the management and disposition of assets. To the extent that a client is concerned that the trustee who administers the trust may not carry out the trust terms in exactly the manner desired, the probate procedure may have some substantial benefit.
Another benefit of probate is that it has a "cut-off period" for creditors. As part of the probate process, a notice of the death is given to all creditors. (8) After notice, creditors have a specified period of time in which to file their claims and those creditors who do not make their claims within that time are thereafter cut off. With an intervivos trust, generally these claims are not cut off. For example, suppose a doctor were to die and a malpractice claim developed ten months after his death. That claim might well be cut off by a proper probate, but it would not be cut off with regard to any assets held in an intervivos trust at his death. Those assets have not gone through the "cleansing action" of probate. Some states, such as California, have a similar termination of creditors' rights for assets held in intervivos trusts.
Question--Under what circumstances can a will be challenged or contested when offered for probate?
Answer--A will can be contested by an interested or aggrieved party on many different grounds. Among the most common causes for contesting are:
(1) The testator lacked sufficient mental capacity.
(2) The testator was unduly influenced at the time the will was drafted.
(3) The will was not executed according to the statutory formalities.
(4) The will offered for probate has been revoked.
(5) The will offered for probate was a forgery.
Question--What things should an estate planner examine in reviewing a will?
Answer--See "How to Review a Will: A Checklist for the Estate and Financial Planner" in Chapter 9.
ASRS: Sec. 50.
(1.) Uniform Probate Code [section]2-501.
(2.) Uniform Probate Code [section]2-502.
(3.) Dan E. McConaughey, Wills, 18 (1984).
(4.) Uniform Probate Code [section]2-502(b).
(5.) Dan E. McConaughey, Wills, 22 (1984).
(6.) Uniform Probate Code [section]3-916.
(7.) Robert J. Lynn, Introduction to Estate Planning, 2nd Ed., 23 (1978).
(8.) Known or ascertainable creditors usually receive direct notice. Unknown creditors usually are notified by publication. The United States Supreme Court has struck down as unconstitutional an Oklahoma statute that bars claims presented more than two months after notice by publication. The court held that such notice does not necessarily satisfy the requirement of due process, that if a creditor's identity is known or reasonably ascertainable, the creditor must receive actual notice. Tulsa Prof. Collection Serv., Inc. v. Pope, 485 US 478 (1988), rev'g and remanding 733 P.2d 396.
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|Title Annotation:||Part 2: Ownership and Transfer of Property|
|Publication:||Tools & Techniques of Estate Planning, 14th ed.|
|Date:||Jan 1, 2006|
|Previous Article:||Chapter 7: Ownership and transfer of property.|
|Next Article:||Chapter 9: How to review a will: a checklist for the estate and financial planner.|