Estate Planning #1

Divorced Statutes

(Forced revocation) Several states have statutes that invalidate provisions of wills executed prior to divorce that leave assets to a former spouse. Only applies to probate assets. Most state do not have such statutes and leave it up to the parties to redo their wills and contracts so as to prevent assets unintentionally passing to former spouse.

Decedent's Personal Property

(Property that is not real estate) passes by the laws of "intestate succession" of the state in which decedent was domiciled. State where taxes were paid, where decedent voted and generally lives for more than half of each year.

Possible Scenarios for a Will Contest

1. Family members disinherited in favor of a "friend", a charity or a spouse married shortly before death. Particularly a problem if family didn't know of testator's intent prior to death. 2. Children are treated differently, particularly if one is disinherited. If one is disinherited, it helps if testator explains why. 3. Additionally, if testator was old and ailing physically or mentally at the time the will was executed.

Order of Abatement (UPC)

1. If no residuary clause, all probate property not disposed of by will. 2. Residuary bequests 3. General bequests 4. Specific bequests Most states abate gifts to spouses or to issue only after bequests to others have been abated.

Nontax Goals of Estate Planning

1. Maintaining a satisfactory standard of living throughout one's remaining years. 2. Providing for the support and care of surviving spouse and any dependents. 3. Ensuring that the disposition of property goes as owner intended - requires careful drafting of documents. 4. Adequate liquidity so that any "death taxes", administration fees etc., and liabilities can be paid without selling assets that owner intended to transfer. 5. Minimize estate transfer costs - attorney, trustee, administrator fees as well as court and probate costs. 6. Preserve business value - Who will run the business when the "boss" dies or is incapacitated.

Witnessed or "Attested" Will (Statutory Will)

1. Must written (printed, typed or hand-written is okay) 2. Must be signed -- Testator must sign the will in front of two witnesses. 3. Must be witnessed -- Witnesses must then sign their names to the will attesting to fact that they saw the testator sign his/her will.

Tax Effective Disclaimer

A disclaimer that does not of itself generate a transfer tax - i.e., the act of disclaiming will not be treated as a gift by the person who makes the disclaimer. To be tax-effective, disclaimer must meet requirements of the state's property laws as well as federal tax law.

Will

A written document that expresses a person's desired disposition of his/her probate property at death.

Per Capita at Each Generation

Descendants by right of representation" -- form of intestate descent that is preferred by the Uniform Probate Code (UPC). Essentially a hybrid of per stirpes and per capita forms of descent. Gives equal shares to surviving descendants of equal closeness to the decedent. Quickly becoming a favorite of Intestate laws as well as estate planners replacing per stirpes.

Anti-Lapse Statute

Determines who is to receive the lapsed bequest in the absence of a provision in the will. Uniform Probate Code (UPC) adopted by several states limits the application of the anti-lapse statute to grandparents and descendants of grandparents. A-L Statutes only apply to bequests in a will.

Advantages of a Will

Enables one to specify the type and amount of property to be distributed to each intended beneficiary. Also allows specification as to the conditions and terms governing any distribution to contingent beneficiaries should distributions to primary beneficiaries "fail". Finally, a will allows one to nominate an executor as well as appoint a guardian for any minor children.

Ademption

Failure of specific bequest because decedent disposed of the identified asset during his/her lifetime. In this case, the beneficiary receives nothing in place of failed specific bequest.

Fraud in the Execution

Get testator's signature to will that was prepared without testator's knowledge or approval. Deceive testator as to what it is they are signing.

Specific Bequest

Gift of a particular item or asset that is capable of being identified and distinguished from all other property in testator's estate.

General Bequest

Gift to be satisfied out of the general assets of an estate. Ex: "I give 10% of my estate to my daughter Susan."

Bequests

Gifts made in a will.

General Power of Attorney

Gives the agent the power to do anything that the principal could do. Some states require that certain powers must be specifically granted by the principal: Power to make gifts Power to engage in self-dealing

Cousins who share:

Grandparents - first cousins Great Grandparents - second cousins 2G Grandparents - third cousins, etc.

Holographic Will

Handwritten with no witnesses to attest

Recipients of Probate Assets

Heir Heir At Law Devisee Legatee Personalty Issue or Descendents

Reciprocal wills (mirror wills or mutual wills)

Husband and wife often sign simple wills at the same time leaving all to surviving spouse (S2) after specified survival period, otherwise to children.

Life Insurance Beneficiary Designation

IRA beneficiary designation Property held in JTWROS Property held in trust

Length of Survivor Clause

Making it at least several months provides protection from multiple death event - i.e., parties perishing in a common accident. Making it too long delays distribution of estate's assets. If a bequest to a spouse is contingent upon survival for a period greater than 6 months, it does not qualify for the unlimited marital deduction (Federal gift and estate tax).

Beneficiaries as Witnesses

Many states limit inheritance of such as witness to what he/she would have received under state's laws of intestacy.

Heir

One who actually inherits property through probate whether by will or law of intestate succession (or any other transfer mechanism such as a trust or by JTWROS).

Devisee

One who receives real property as beneficiary of a will or a gift.

Nuncupative Will

Oral, dying declarations made before multiple witnesses. Not recognized in most states. In few that do recognize, witnesses must submit written affidavits declaring decedent's final wishes. In either case, a nuncupative will can only transfer personal property, transfer of real property requires writing in all states.

Personal Representative

Person appointed by the probate court to act as a fiduciary in acting for and managing the decedent's estate through the probate process.

Administrator

Personal representative appointed by the court to represent the estate of an intestate decedent.

Executor

Personal representative of a testate decedent. Executor is usually nominated in the decedent's will to dispose of decedent's estate as directed by that will. Ultimately the executor is appointed by the court.

Felonious Homicide

Prevents transfer of assets in decedent's probate estate to a person who has been convicted of intentionally killing that decedent.

Ancillary Probate

Probate process that must be opened in a state other than the state of domicile because decedent owned real property not located in the state of domicile. Remember: Probate law of the state of "situs" always controls the transfer of real property at death. Probate law of state of domicile controls transfer of personal property.

Successful estate planning requires knowledge of:

Property law Income tax and estate tax law Wills Trusts Present and future interests Estate administration and probate Insurance

Non-Probate Assets

Property that is held in trust, property held in JTWROS or as life estate, and retirement assets or life insurance death benefits where the beneficiary is not the decedent's estate.

Personalty

Property that is not real estate - personal property (not personal use property).

Decedent's Real Property

Real property passes by the laws of "intestate succession" of the state in which the property is located (i.e., the property's "situs")

Partially Intestate

Refers to a decedent who had a will, but that will did not completely dispose of the decedent's probate estate. State laws of "intestate succession" apply where a decedent leaves behind property that is not transferred by will or other means.

Intestate

Refers to decedent who dies without leaving a valid will. Not a problem if all of decedent's property is transferred by alternative means i.e., by trust, by contract, or by law.

Collateral Relatives

Relatives who simply share a common ancestor with the decedent. (Brothers, sisters, aunts, uncles, nieces, nephews, cousins).

Witness to Execution of Will

Should be disinterested people, not family members, not beneficiaries.

Net Estate

Smaller than the gross estate because it has been reduced by the amount of decedent's liabilities at time of death. Also a "tax concept"

Survivor Clause

States the testator imposes upon the legatee the requirement that he survive the testator by a certain period of time. Ex: "if the beneficiary survives me by 120 days" Reduces the probability that bequeathed property would be subject to two successive probate processes in a short period of time.

Avoiding Will Contests

Testator while alive should be open and transparent with family and potential heirs regarding his/her estate plan so that upon death and reading of will there are no significant surprises. That way if someone objects, they can take it up with the Testator, not the court.

Probate Estate

That property whose dispositions in guided by decedent's will or by the state's law of intestate succession.

Degrees of Consanguinity

The degree of closeness in blood relationships

Probate

The legal process of administering the probate estate of the decedent with court supervision.

Principal

The person granting the power of attorney to another to act on his/her behalf. To grant a power, a person must be over the age of majority (18 years of age) and legally competent. The principal can revoke any power of attorney as long as he/she is legally competent. This is done by giving notice to the agent in writing. All powers of attorney cease upon the death of the principal.

Testator

The person who makes the will. The person whose estate is disposed of by the will.

Gross Estate

The property or assets attributed to the decedent at death for estate tax purposes. This is a "tax concept".

Abatement

The reduction or elimination of bequests by law so that all debts and administrative expenses can be paid in full.

If State has no anti-lapse statute or if statute does not apply (i.e., lapsed gift was not to a blood relative)

Then the lapsed bequest would pass to the residuary beneficiary

If a residuary bequest fails:

Then the specific assets pass by state's law of intestate succession (laws of "descent and distribution").

Probate Estate

Those assets from the a decedent's estate which pass to other via the probate process. Excludes those assets which transfer "by law", "by contract" or "by trust". E.g., IRA with named beneficiary

Residue of Estate

Those assets not otherwise disposed of by the will or other documents. What remains of a probate estate after all foregoing instructions in the will have been carried out. The purpose of a residual clause in a will is to dispose of the "residue" of the estate.

Ascendants

Those persons from whom the decedent is descended. Parents, Grandparents, 1G, 2G, etc.

Testamentary Transfers

Those transfers that are directed by a will. A will can only transfer property for which there is no other guide to transfer that takes priority over a will.

Military Will

Verbal, unattested statement by a soldier in active military service. Recognized in many states, but again can only transfer personal property, not real property.

Revocation

Very easy, destroy the existing copies and/or write a new will that specifically revokes any prior wills. Any physical act against the will must be with the intent to revoke to be an effective revocation.

Mistake

Will can be challenged because testator made a mistake. Ex: Testator unintentionally left out one of 15 grandchildren, etc. Good reason to use class gift.

Self-Proving Will

Witnesses sign in front of a notary and the witnesses signatures are notarized - so witnesses will not have to appear before the probate court to testify that they truly saw testator sign and that he had testamentary intent!!!

Legatee

A beneficiary under decedent's will who receives personal property (property other than real estate).

Income Tax Goals of Estate Planning

1. Obtaining a "stepped-up" basis: Depending upon laws in place at time of death, all lifetime capital gains may be forgiven at death. Great income tax dodge!!! IRS is in process of implementing new rules requiring the maintenance of cost basis on all brokerage and mutual fund accounts. May signal that stepped-up basis is going away permanently. 2. Shifting income to low tax bracket taxpayers: Due to progressive income tax rates, it may be attractive to shift income to children or retired parents who are in lower marginal brackets. This is why Congress enacted the so-called "Kiddie" tax rules. 3. Deferring recognition of income: "A tax deferred is a tax avoided"!! By choosing the right tax year in which to recognize gain, one can limit the tax impact of that income

Once disclaimed, property may:

1. Pass to an "alternate taker" (contingent beneficiary) in accordance with the decedent's transfer document which will generally be a will or a trust. 2. Pass under the residuary clause if the will has one. 3. or pass under the state's laws of intestate succession.

Estate planning addresses two issues

1. Planning the transfer of one's assets and liabilities 2. Planning the transfer on one's personal responsibilities - Power of attorney, healthcare power of attorney etc., advance directives (to handle contingencies such as incompetence).

Nonfinancial Goals of Estate Planning

1. Providing an equitable and proper distribution of property 2. Maintaining privacy in the transfer process - more important for some than others. 3. Prompt transfer of assets -- some means for transferring result in much quicker transfer than others. 4. Maintaining as much control over assets as possible until the transfer - gifting during lifetime can lower estate taxes, but is owner willing to give up control of those assets? 5. Lifetime and postmortem flexibility - plan can be altered by client or surrogates to meet client's goals as circumstances change.

Transfer Tax Estate Planning Goals

1. Reduce the estate tax base: The easiest way to do this is by making lifetime gifts. For 2021, any person can give up to $15,000 per year to any one beneficiary without triggering the requirement to file a gift tax return and report those gifts. Thus, a husband and wife could each year give $30,000 to their son as well as $30,000 to the son's wife. If son and wife had children, the parents together could give $30,000 annually to each grandchild as well. Those gifts will be excluded from the unified gift and estate tax. 2. Freeze the estate tax base: This is accomplished by gifting away assets that are likely to experience significant value appreciation in the future. Removes the future appreciation from estate. A good vehicle for this is a whole life insurance policy. Policy ownership can be transferred at today's "cash value" whereas the death benefit is likely to be equal to 5 or 10 times that cash value.

Requirements of Holographic Will

1. Signature must be in testator's handwriting Signing can be a "mark", a fingerprint, or writing made with another person guiding the testator's hand - as long as can be identified as belonging to testator. 2. All the "material provisions" must be in testator's handwriting. Material provisions are the dispositive provisions: nomination of executor, the nomination of guardians, identification of beneficiaries and the property they are to receive.

Requirements of Testamentary Capacity

1. Sufficient mental capacity to understand he/she is executing a will. 2. Sufficient mental capacity to understand the general nature and the extent of his/her property - aware of what he/she owns. 3. Sufficient mental capacity to know who his/her family and friends are and the extent of family and friends. Courts seem to have an extremely low threshold for testamentary capacity and are unlikely to deny wills without very strong evidence.

Sound Mind

1. Testamentary Capacity 2. No Undue Influence 3. No Fraud

The Goals of Estate Planning

1. To preserve options. Incorporate the means to provide long-term flexibility as circumstances change. 2. The ultimate goal of estate planning - happiness and peace of mind.

Revocation by Operation of Law

A few states automatically revoke a will under certain situations (usually divorce or annulment of marriage). In these cases, an intent of testator to revoke is not necessary. In most states, divorce or annulment of marriage do not revoke a will.

Forced Heirship

A few states have laws that require that specific minimum portions of a decedent's estate must be transferred to decedent's children. Much more common in Europe to protect children's rights then in U.S. Some states may protect the rights of dependent children, but do not generally give children priority over a surviving spouse whether or not that spouse is their parent.

Pecuniary Bequest

A general bequest of a specific dollar amount. Ex: "I give my daughter Susan $10,000."

Residual Bequest

A general bequest of the balance of the probate estate not otherwise disposed of by the will. As long as there is a residual clause in a decedent's will, the decedent will not be "partially intestate".

Class Gift

A gift to a group of people where the members of group may not be fully identifiable at time the will is written: Ex: "to all of my children who are living at the time of my death".

Lapse

A lapse occurs when a will names a beneficiary who fails to survive the testator.

Common Provision

A lapsed bequest to a predeceased blood relative passes instead to the issue of that relative. This bypasses a surviving spouse of the relative (not a blood relative)!!

Power of Attorney (POA)

A legal document that authorizes one person to act on behalf of another person.

Side Letter of Instruction

A note or letter that states the decedent's wishes as to the disposition of specific tangible possessions such as jewelry, family heirlooms etc. Letter could also state decedent's funeral and burial wishes. May give location of important documents, passwords for important digital files, location of safety deposit boxes etc. Exists separate from the will to avoid cluttering will with small details and to be available for instruction prior to probate. Letter should be directed to personal representative and close family who are likely to follow it even though it has no legal standing.

Fiduciary

A person in a position of trust who has the legal duty to act for the benefit of another person, putting that person's interest above his/her own. Fiduciaries include executors of estates, administrators of estates, trustees, guardians, agents.

Heir At Law

A person who would have the right to inherit from the decedent if the decedent were to die intestate.

Issue or Descendents

A person' offspring or progeny such as children, grandchildren, great grandchildren etc. The entire group. Adopted children are treated the same as biological children.

Estate

A quantity of wealth or property - those assets which you own and/or control.

Codicil

A separate document or attachment to a will which amends or supplements an existing will. If accepted into probate it effectively becomes part of the will. Formalities - Most state require that a codicil meet all the legal requirements of a will. In particular, a codicil must be signed and properly witnessed. In some states a hand-written (holographic) codicil is effective.

Joint Will

A single document operating as the will of both spouses

Testate

Adjective referring to a decedent who has left a valid will.

Marital Share

All states protect a surviving spouse from being disinherited by providing a minimum statutory share that must be left to S2 (usually 1/3).

Agent

Also known as the "attorney in fact" or as the "holder of the power" must also be over the age of majority and legally competent.

Disclaimer

An unqualified refusal to accept a gift or a bequest Disclaiming may be beneficial when it avoids, reduces or delays payment of transfer taxes. If disclaimer is done correctly, the act of disclaiming will not be treated as a gift by the person disclaiming.

Who may execute a will:

Any individual of "sound mind" who is 18 or older. Estates of individuals who die before age 18 are subject to state laws of intestate succession which generally give the estate to parents (siblings if parents are deceased). Exceptions: emancipated minor or a minor who is married.

No Contest Clause

Attempt to discourage challenges to the will, testators often put in a "no contest" clause - maybe with the knowledge that some will be disgruntled. "I have purposely made no provisions herein for any other person or persons, other than as set forth in this will, and if any person contests this will, I revoke any share or interest given such person and said share or interest shall be disposed of as though said person predeceased me without leaving issue." Most states will not enforce such a clause as long as there is a probable cause for contesting the will. Will contests are infrequent and seldom are they successful.

If codicil addresses a significant issue

Best practice is to simply redraft the will which is easy today with word-processing. Simply save the document file for original will and amend as necessary and the sign, witness and notarize.

Contractual Will

Contractual will are seen as agreements between two spouses which cannot be amended or changed once one of the spouses dies. One reason not to do a joint will -- Courts are likely to view a joint will as representing contractual wills and not allow surviving spouse's later will to be admitted to probate. This is also a danger with simple wills that are reciprocal and executed at the same time - wise to execute the two spouses' wills on different dates.

Testamentary Capacity

Court will not probate a will if it can be established that testator lacked testamentary capacity at the time the will was executed.

No Fraud

Deception through false information. Usually involves someone who will benefit telling testator something untrue about another party who would normally be a beneficiary - fraud in the inducement.

Documented Intended to be a Will

In some states, courts may admit written instruments that don't meet requirements of a witnessed will or a holographic will. Must be clear and convincing evidence of writer's testamentary intention!

No Undue Influence

Influence by someone the testator confides in that has the effect of overcoming the testator's free will. Mere advice, persuasion or kindness does not constitute "undue influence" - must be so severe as to "overcome testator's free will" I.e. testator must feel somehow "compelled" to do what influencer wants,

Descendant

Issue of the decedent Children, grandchildren, etc.

Per Capita

Latin for "by the head" Gives each person alive at the top of a line of descent the same share of the estate. "To share and share alike"

Per Stirpes

Latin for "by the root", sometimes referred to as "by right of representation. Provides that each line of descent from the decedent gets the same share. Gives a higher share to issue closer to the decedent. Each child's line gets the share that their parent would have gotten had they survived!