Chapter 4

Will-requirements

- 18 years of age or older - Sound mind - No undue influence - Typed - Declaration - Sign and date - 2 impartial witnesses

Joint tenancy with right of survivorship

- 2 or more owners - Time: became owners at same time; - Title: 1 deed gives title to both - Interest: JT's have equal interest - Possession: JT's have equal right of possession - Right of survivor(s) upon death of other JT's interest passes automatically to surviving JT's, by operation of law - No probate necessary

Will

- A document that controls the flow of your personal property such as jewelry, family heirlooms, and assets held in your name only. - It does not control what passes by beneficiary designation (for example, life insurance, IRAs, retirement plans, Transfer on death agreements), by contract (for example, accounts held by joint tenancy with rights of survivorship), or by trust

Elective share: Choose 1 or the other

- A spouse may give up any rights to property bequeathed to her/him. - If a spouse elects against deceased spouse's wishes and takes elective share, spouse may give up rights to property bequeathed to him/her - Remember: if community property, ½ assets owned by each spouse means surviving spouse is provided for - Remember: so long as there is no prenuptial or postnuptial agreement limiting the surviving spouse, SS cannot be legally excluded from an estate.

Common Estate Planning Strategies: Testamentary trust

- A testamentary trust (is contained in a will) and created a trust upon the death of the testator - A testamentary trust = a common estate planning device whereby a trust is funded from assets that flow from a decedent's will at death

Deeds of title/real property

- A transfer on death is just like a normal quit claim or warranty deed that transfers property to a new owner. - The deeds of title are contracts that dispose of real property at the owner's death - The owner delivers the deed to an escrow agent who delivers the deed of title to the done at the donor's death. The deed must deliver the present title to the escrow agent at time of delivery. Title must pass during the grantor's lifetime. - Title to real property basically passes during the grantor's lifetime and the asset avoids probate. - However, these are "contracts" that dispose of real property at a property owner's death, by delivering the deed to an escrow agent, who then delivers the deed of title to the donee or beneficiary at the donor's death - Title must pass during the grantor's lifetime to avoid probate!

transfers through trusts..

- All property owned by an irrevocable trust (the corpus) at the time of death, is not owned by the decedent, thus, it is not considered part of their gross estate. If the trust is a revocable living trust, the asset will be included in the decedent's gross estate. - The property already in a trust will be transferred to the trust beneficiaries per the terms of the trust whether revocable or irrevocable, and will not have to be probated - By establishing a pour-over will and a revocable trust- the assets will not have to be probated if done effectively - *the client must transfer assets into the revocable trust before his or her death. They can also name the trust as beneficiary of POD or TOD accounts. = not subject to probate - They key here, is making sure the assets are not titled in the decedent's name at death, and already transferred to the trust - If a client keeps assets in his name and uses a pour-over provision in a will to fund a trust = assets are subject to probate! (and expense) - TIP: put assets in the trusts name as beneficiary by POD or TOD; (then they are not owned by decedent at death and are not subject to probate)

What if an heir does not want the property? Why not disclaim it?

- Although property is erected to pass or designated to certain heirs after a person's death, the heirs are not required to accept the property. - Heirs who choose to refuse acceptance of such a transfer have disclaimed the transfer to them. - If an heir disclaims property, the will or trust considers the beneficiary as having died before the property owner, and whoever would inherit the property in that case will then inherit the property - Beneficiaries who have no need for property, or when taking the property would push them into a higher tax bracket = disclaim

What are Homestead Rights?

- An artificial estate in land, created to protect the possession and enjoyment of the owner against claims of creditors by preventing the sale of property for payment of owner's debts, so long as occupied as a home. - Example: a surviving spouse and minor children may continue to live in a home-irrespective of the financial adversities held by the decedent

Assets passing by operation of law

- Assets held as JTWROS - Life Estates or for Term of Years - Totten trusts, POD's, TOD's - Transfer through trusts

Transfers by contract... avoid probate

- Assets that are transferred by contract that pass to a designated beneficiary = avoid probate - Most common-life insurance policies, IRA's, 401(k)'s, 403(b)'s and other retirement acts and pensions.

Assets passing by contract

- Beneficiary designation - Prenuptial agreement - buy/sell agreements - Deeds of Title

By Contract or beneficiary designation

- Beneficiary designations are most common with life insurance and retirement plans, but they can be added to almost all types of assets (bank accounts, investment accounts, stocks, bonds, LLC interest accounts, cars, real estate, etc.). Depending on a clients estate plan, the beneficiary could be a spouse, children, charitable organizations, or a trust. - By contract - the key = designating a beneficiary

Client Hype: Pour over will Example:

- Carmine has a will indicating any property he owns at death is to pour over into his revocable trust. His assets: (sole ownership) - Bank account - Investment account - Life insurance policy (on his wife) - At his death, all these assets pass under his will into his trust. All these assets must be probated - The terms of the trust dictate how and when the assets will be distributed to trust beneficiaries

Pour-over wills

- Created to "catch" any assets or property that has been left out of a living trust, intentionally or inadvertently - A pour-over will does not create a trust - A pour-over clause may then allow the assets to become part of the (testamentary) trust

What is a "business interest" passes into an estate:

- Financial professionals often encounter successful C Corps, S Corps, or LLCs where the founder of the business enterprise or professional practice is the 100% owner. Typically, there may be younger family members who the owner would like to "take over" the business in the future to keep it as an ongoing enterprise when they die. If there are no family members, there may be key employees or professionals that would like to acquire the business or professional practice as an ongoing entity. - A unilateral "one-way" buy-sell agreement between the 100% shareholder and family members or key employees working in the business is drafted by the law firm of your client. These adult children or key employees will buy the shares from the founder's estate for a specified price when the founder dies. These younger family members or key employees are the ones who the founder wishes to "take over" the business

Titling is important because...

- How the property is titled determines which of those 3 ways it will pass - That is why it is important to understand how property is titled --to know whether it must be probated or to whom it will pass... - In severalty = sole ownership - With others = JTWROS/Tenants in common/tenancy by the entirety

Other benefits of using a revocable trust:

- If one has minor children - naming the trust beneficiary of life insurance keeps these assets out of probate and court-supervised guardianship - Owning real estate in 2 or more states - it allows loved ones to avoid more probate administrations - One can create a disability plan to keep them and assets outside of court-supervised guardianship - Beneficiaries have immediate access to property after death instead of waiting weeks or months for access through probate court. - Keeps financial matters private.

Alabama Code- Intestacy law section 43-8-41 share of the surviving spouse

- If there is no surviving issue or parent of the decedent, the entire estate - If there is no surviving issue but decedent is survived by a parent or parents, the first $100,000 in value, plus ½ the balance of the interstate estate - If there are surviving issues, all of who are issues of the surviving spouse. Also, the first $50,000 in value, plus ½ the balance of the estate - If there are surviving issue one or more of whom are not issue of the surviving spouse, one-half of the estate - If the estate is located in two or more states, the share shall not exceed in the aggregate of the allowable amounts under this chapter.

Joint Tenancy- will pass by operation of law

- Joint tenancy - 2 or more owners at same time - Characterized by: time, title, interest and possession - All joint tenants received identical interest in title to property at same time and have equal rights to possess.

Avoiding Probate

- Less cost - Takes less time - Keeps it private - Assets pass quickly to heirs/beneficiaries

Avoiding Probate by operation of law

- Name a Transfer on death beneficiary (TOD) - Name a payment on death beneficiary (POD) - Share ownership - Remember: the probate estate is different than the gross estate

Tenancy in common

- No right of survivorship - Each tenant must pass his or her interest by will or it will be subject to intestacy - Must be probated

Elective share: You can't disinherit a spouse

- No state will allow a spouse to disinherit his or her surviving spouse. This allows the surviving spouse to elect to receive an amount prescribed by state law, which varies according to the property that is eligible and in amount. - State law determines the amount reserved for a spouse, where the estate is located. - In most states, the elective share is between ⅓ and ½ of all property in the estate.

Assets paid to the estate = probated

- Normally, life insurance and retirement assets are paid to a "designated beneficiary" - If no beneficiary is designated, or if the "estate" is designated, then the assets are subject to probate.

Asset transferred to trusts before death avoid probate

- Note: had the decedent transferred the assets into the revocable trust before death, they would not have to be probated. - The key here, is making sure the assets are not titled in the decedent's name at death, and already transferred to the trust

POD's

- POD applies to money and bank accounts. The account is "paid" out after your death to your beneficiary of choice, who can then do what they want with the money. However, the bank account must be closed. - Most states allow a POD beneficiary to take over an account without probate if a will gives you a right to the money and the sum in the account does not exceed a certain amount (provide bank with copy of death certificate, the will and a declaration) - Naming a POD or TOD is the safest way to ensure that your property passes to whom you wish, without giving them any interest in it until after your death

Life Insurance policies and retirement acts:

- Pass automatically to named beneficiary(s) - However: a. If none named, they are subject to probate b. If an "estate" is named as beneficiary, then it becomes a probate asset c. Thus: it's important to name a contingent beneficiary in case the first beneficiary dies

By operation of Law= automatically passes

- Property can be owned by a trust at death, (or pass to a trust at death via a Will or beneficiary designation). Property owned by a trust at death will be excluded from a decedent's probate estate, and the trust's terms will control to whom and how such property passes. Trusts can serve several potential benefits, both tax and non-tax - Since the assets have already been transferred to the revocable trust, they avoid probate.

In Severalty

- Property is held by one person - Sole ownership - If property is owned solely by one person at their death, it must be probated. - "Severed" ownership

Methods of property transfer at death

- Property will pass at death in one of (3) ways: 1. By probate: Will or intestacy 2. By operation of Law: JTWROS, Tenancy by entirety, POD or TOD, and by Trust 3. By contract: life insurance, retirement assets (401k), prenuptial/post nuptial agreements, buy/sell agreements, deeds of title. - It is important for an estate planner to understand the manner in which assets will pass at death, this determines whether the asset is subject to probate and whom it will pass.

Methods of Property Transfer at Death

- Property will pass at death in one of three (3) ways 1. By probate 2. By operation of law 3. By contract -Assets may also pass by trust (considered by contract) - How property is titled determines which of those 4 ways it passes

Forms of Ownership

- Sole ownership - Tenants in common - Joint tenancy - Community property - Partnership - Corporation

Probate

- Supervised by the court - Proves validity of will/docs - 9 mon-2 years - Public proceeding/records - Creditor protection/notification - Heirs interests protected

Elective share in alabama:

- The elective share is the lesser of: a. The value of the decedent's estate minus the value of the spouse's estate b. One-third of the decedent's estate - Surviving spouse must file a petition with the court within 6 months after the death of their spouse or within 6 months after probate of the will, whichever expires last

Avoid probate = avoid expenses + save time

- The focus of this chapter ultimately reminds the financial planner of the importance of how property is transferred at death in order to avoid the costs, time element and expenses of probate. - Alternate methods of transferring property at death can help avoid paying excess estate taxes and keep assets outside of the probate process.

Enforceability of prenuptial agreements:

- The spouse must have provided with complete information about the other spouse's property and finances prior to signing it A minimum period of 7 days must pass between receipt of the agreement and signing it (in california) - The spouse must have been represented by a separate, independent attorney when signing the agreement, unless the spouse received full information in writing describing the terms and basic effect of the agreement, including an explanation of any rights and obligations the agreement would nullify, and signed an acknowledgement of receiving the document, and waiving the right to an attorney (probably not a good idea!)

Prenuptial and postnuptial agreements

- These dictate the amounts a surviving spouse will receive after the decedent spouse's death. - Very common is 2nd marriages - If executed properly, the terms of the agreement override the laws that would ordinarily apply to determine that.

Buy/sell agreements

- These types of contracts lay out the disposition of a business owner's interest upon his death. - Surviving business owners have the option to purchase the deceased owner's interest. - These are will substitutes that keep the deceased business owner's stock or interest OUT OF PROBATE

Alabama Code- Intestacy law section 43-8-41 share of heirs other than surviving spouse

- To the issue of the decedent; if they are all of the same degree of kinship to the decedent they take equally, but if of unequal degree, then those of more remote degree take by representation - If there is no surviving issue, to his parents or parents equally - If there is no surviving issue or parent, to the issue of the parents or either of them by representation - If no surviving issue, parent or issue of parent, but decedent is survived by one or more grandparents or issue of grandparents, half of the estate passes to the paternal grandparents (if both survive) or to the other surviving paternal grandparents or to the issue of the paternal grandparents if both are deceased, the issue taking equally if all are of same degree of kinship to the decedent...the other half passes to the maternal relatives in the same manner

How does the asset pass? A stock account owned by the decedent's revocable trust. (the asset must have already been transferred into the revocable trust)

- Trust - a hybrid situation, technically property can pass by contract, operation of law or probate - Property put into a revocable trust - becomes irrevocable at the death of the creator/grantor = by operation of law the property is now property of the trust for good - However, the terms of a trust dictate who the beneficiaries are, when and how much they receive for the corpus; what powers the trustee will have = a contract - Compare: pour-over provisions of a will where assets will go into a trust after death of the grantor; the assets will now be subject to probate before they can pass

Concurrent Ownership

- Two or more persons own property at the same time - Three types: 1. Tenancy in common 2. Joint tenancy - if 1 joint tenant dies: Deceased owner's interest in the property transfers directly to the surviving/remaining joint tenant(s) or owners(s) 3. Tenancy by the entirety

Section 2: Intestacy Laws

- When a person dies without a will, they die intestate. Assets passing by the intestacy are subject to probate. - Statues of descent and distribution which attempt to carry out the likely intent and wished of the decedent. q. Surviving spouse and children, not in-laws. b. Stepchildren, adopted children, illegitimate children. c. Grandchildren

Property transferred by will - is probated

- Whether it's from a pour-over will or into a testamentary trust - Any property mentioned in the will is subject to probate - In both situations above, the assets first pass under the decedent's will before they are transferred into the trusts - Thus, they are subject to probate and will pass by will to the decedent's heirs. - Note: only if an irrevocable trust is holding assets at time of death are they shielded from probate.

Personal Property

- anything not real property - Tangible (moveable things) - Intangible (cannot be reduced to physical form, patents, copyrights, stock CD's, bonds)

A revocable trust: the rules

1- the trust must be fully funded to avoid probate; (it is possible that a quirk in state law makes probate necessary) 2- an unfunded revocable trust won't avoid probate - any unfunded property will need to be probated. 3- a revocable trust will protect privacy, but a will becomes a public probate record for all to see. 4 - a revocable trust allows one to plan for disability and avoid probate, but does absolutely nothing to reduce estate taxes.

Case design and life insurance solution: Allen executes a "unilateral" buy sell agreement with Carl and David in which Carl and David agree to buy Allen's shares of the S Corp for $3,000,000 from Allen's estate at death. Carl and David are listed as equal owners and equal beneficiaries of a $3,000,000 life insurance policy on Allen's life from a competitive carrier. The S Corp advances tax deductible bonus compensation to Carl and David to pay the premium (Carl and David must report the bonuses as taxable earned income which is also subject to FICA taxes). Allen also executes the usual pour-over will and revocable trust for surviving spouse and family to provide portfolio asset management after Allen's death.

1. At Allen's death, Carl and David receive $3 million of income tax free death proceeds which they use to buy equal 50-50 shares of the S Corp from Allen's estate. 2. Allen's estate now has $3 million of cash to distribute via Allen's pour-over will into the revocable trust. This trust automatically becomes irrevocable at his death. 3. Beth has unlimited access to the income and principal of the trust (the $3 million paid to the estate by Carl and David to acquire the business) for life to satisfy her lifestyle needs.

Assets the pass by probate (2 ways)

1. By Will - Sole ownership -Tenancy in common - Community property 2. Intestacy - because no valid will - Each state has intestacy statutes which dictate who will inherit property from a decedent who did not leave a will - sole owner tenant in common community property

Postnuptial

= after marriage agreement

Prenuptial

= before marriage agreement = contracts

Common estate planning strategies: Pour-over will

A pour-over will may direct any property owned at the time of death to pour-over into a revocable trust.

Assets that pass by operation of law=not probated

Automatically pass: - Joint held-with right of survivorship - As tenants by the entirety - Life estates - Estates for a term of years - Totten trusts - simply transfer money into a bank account in your name as trustee for another person - POD and TOD = payable-on-death and transferable-on-death-simply designate that the account is payable at death to a named person. TOD's are used for stocks, mutual funds and other accounts holding securities.

How does the asset pass? A bank account titled jointly with the decedent;s daughter?

By Operation of law

How does the asset pass? Life insurance payable to decedent's surviving spouse?

By contract - normally, life insurance and retirement assets are paid to a designated beneficiary, and pass by contract

How does the asset pass? An IRA payable to the decedent's estate?

By probate - since the iRA is made payable to the decedent's estate, it must now be probated

How does the asset pass? Decedent's interest in a vacation home owned as tenants in common with his brother.

By probate - the brothers share must pass by will or intestacy = probate

Real property

Land or real estate

Joint Tenancy- will pass by operation of law Example: Bob Black execute a deed to his 3 children Tina, Todd, and Ted Time: 1 deed Title: 1 deed Equal interest: ⅓ shares each

Possession: joint tenancy presumes each has equal right to possession

How does the asset pass? A home that decedent leaves to his wife in his will

Probate

How does the asset pass? A mutual fund account that decedent held in his own name

Probate

Transfers by contract: Situation example

Situation: carmine has a life insurance policy and names his parents as beneficiaries, and no contingent beneficiary is named. If both his parents have died before him, the amount of the insurance policy will be included in his gross estate and will have to be probated. If Carmine has no will, his state's laws of intestacy will determine who gets the money.

TOD's

TOD(transfer on death) applies to property that you own. That property will be transferred at your death to the named beneficiary who can then do with it what they would like.

Persons appointed: Executor

The person who administers your final estate. That person should be sensitive to the needs of your beneficiaries, competent to handle financial and legal matters, and available and willing to take on responsibilities.

Persons appointed: Guardian

The persons who will take care of your dependents. They should know your child already (if possible), have similar philosophic views to your own, and be financially able to take on the responsibility of caring for your children.

Dower, Curtesy and Homestead

a widow's right to a life estate in a portion of her husband's property. Curtesy is the equivalent right of a windower. (purpose was to protect the surviving spouse from creditors claims and disinheritance) Now abolished in Alabama and some states.

Tenancy in common - must be probated Example:

if the unity of interest is not present, a joint tenancy has not been created, a tenancy in common is automatically created when a JT is not created. (¼, ¼, ½)

Homestead

protection for surviving spouse, amount varies from state to state. Some states also provide for a family allowance to pay for living expenses.