Making Sense Of Wills, Trust, And Estate Planning

By: Lloyd Copenbarger

Q: To plan for the future, where do I start?

A: In order to adequately plan your estate, you must start with the basics.

First, you have to determine what you want from life, and what you hope to accomplish with the time remaining. You must come to an understanding with your spouse about your short, intermediate and long-term goals. You can hire the finest law firm in the country to draft your will, but if that planning does not give you peace of mind, reflect your goals and advance your wishes after death, then those resources have been wasted.

Q: What is a will?

A: A will is a legally enforceable declaration of your instructions regarding matters to be attended to after your death. A will does not necessarily have to dispose of property. It can, for example, provide instructions for burial and funeral arrangements only. The distribution of property can be made under the laws of descent and distribution as if there were no will.

Q: Who is qualified to make a will?

A: The power to make a will is not an unlimited right. Certain legal requirements must be satisfied.

The ability to make a will is called “testamentary capacity.” You demonstrate this by being of the requisite age and by being of sound mind.

All states recognize that a person who is at least 21 years old is of a legal age to make a will. Most states only require that a person be 18, and many states allow any married person to make a will, regardless of age.

The requirement of sound mind does not mean a high level of intelligence, or even literacy. The general rule is that you must be aware that you are making a will, have that intent, and know the extent of your property.

You must also know those people who are the natural objects of your bounty, and you must recognize the relationship between your property and those persons who would normally be expected to be included in a division of that property.

The capacity to make a will is determined on the date the will is made. You must simply meet all the requirements of “testamentary capacity” on the day the will is actually signed.

Q: Are there different types of wills?

A: Yes, three types of wills are generally used in the United States. The most common, and certainly the type to be most recommended, is the attested will. This is a typed or printed document that fulfills all the requirements of the statute of wills for execution. If you possess the necessary testamentary capacity, the will shall be enforced by a court of law.

The second type of will that has wide use in our country is the holographic will. This is handwritten by the testator, the person making the will, and is not witnessed by any person.

Holographic wills are extremely risky. Only about one-third of the states recognize their validity, and requirements governing their admission to probate are quite stringent. If any technical requirement is not met, then the will is disregarded and the person’s property passes under the laws of the state.

The final type of will is an oral will. In most states, if allowed at all, this will is only valid for soldiers in time of combat and only to pass very small amounts of personal property – normally, amounts less than $2,000.

Q: What is actually contained in a will?

A: A will is normally composed of the following parts: First, an introductory paragraph identifies the testator and possibly gives his family history. Also, a revocation clause cancels any previous wills or codicils (amendments) that the testator may have made. Frequently, there is a provision for the payment of debts, funeral costs and any expenses to administer the estate.

Then the will contains the disposition provision, of which there are three types. One provides for a disposition of personal property – small items to individuals. These are called legacies. A second dispositive provision is for the devises of real property, in which specific items are given to specific persons. Finally, there is a residuary clause, which provides for any property that has not been disposed of under a legacy or a devise to go to designated persons, usually by percentage.

The will also names a person or persons to act as executors, the legal representatives of the deceased testator, to carry out the instructions in the will. Finally, there are signature lines for the testator and witnesses.

Although a will may be properly drafted, it is not valid unless it has been executed in strict conformity with the laws of the state where the testator lives or where the will is being executed. These rules are quite complex, and a will should not be executed unless the local legal requirements have been studied and observed. Otherwise, it is wisest to have the will executed under the direction of an attorney.

Q: How often should a will be reviewed and updated?

A: A will should be constantly reviewed. If your financial or family situation changes, the will should be altered to reflect those new circumstances. This can be done by codicil, in conformity with the rules governing the execution of a will.

If a will is totally outdated by changes in family or financial circumstances, it can be revoked in several ways. These include making a later will containing a revocation clause, making a codicil that revokes the will, creating a will that is wholly inconsistent with the earlier will, or by physically destroying or mutilating the will with the intention of revoking it. In some states, wills are also revoked by operation of law. This can occur, depending on the state, due to marriage, divorce or the birth of a child.

Q: On what basis can a will be contested?

A: A will can be contested on seven grounds. Therefore, a primary responsibility of a person supervising the execution of a will is to make certain that those grounds do not exist at the time the will is written.

The first ground for contesting a will is that it was not properly executed. Examples would be an insufficient number of witnesses to the will, or that the witnesses did not sign the will in the presence of the testator, or, in the case of a holographic will, that the testator did not write the will completely in his own handwriting.

A second ground for contesting a will is the lack of testamentary capacity at the time the will was made.

A third ground for contesting a will is that it was executed under undue influence. For a will to be valid, it must represent the free exercise of the wishes of the testator. If he is doing what someone else wants him to do, rather than what he wants to do, the will can be set aside.

The fourth ground for contesting a will is fraud. This can occur when the testator is misled into making a will based on intentionally fraudulent information given to him. For example, a parent might be led to believe his child is dead and therefore disinherit him.

The fifth ground for contesting a will occurs when there is a mistake – either in the execution of the will, or in its contents. A mistake in contents is very difficult to prove, however.

The sixth ground for contesting a will is forgery. This occurs where a will is signed by someone purporting to be the testator. (This also is a criminal act.)

The seventh ground for contesting a will is that it has been revoked by the testator or by operation of law.

Q: What happens to my property if I die before making a will?

A: If you have not prepared a will to provide for the distribution of your property after death, then it will be distributed by the laws of the state in which you reside at the time of your death. These laws provide for the distribution of your property to those the state believes are most entitled to receive it.

In many cases the statutory scheme of distribution will be quite similar to your own wishes. However, the statutory scheme will never provide gifts to charities or to those non-relatives who have been important to you. It also will not make any distinction between the persons who have a legal right to receive your property and their importance to you.

Q: What is probate?

A: Probate is a method of transferring title to property by court procedure following the death of a testator. This can be a complicated and time-consuming process. However, it makes certain that property is transferred either according to your wishes or according to the law of descent and distribution.

In the last few years, we have heard many negative comments regarding probate. These statements, for the most part, are often made by people who do not understand the basic purpose of the probate proceeding. Probate is based on the obvious premise that after death you will not be in a position to act on your own behalf.

Since there is great opportunity for fraudulent acquisition of property, probate rules were established to make certain that, as nearly as possible, the courts distribute your property fairly and properly.

Q: I already have a will. Doesn’t that avoid probate?

A: No. A will must go through the probate process to be given legal effect. Even if your will contains a trust, the trust only comes into effect when the will is probated. (Trusts are discussed at length later in the booklet.)

Q: Why might I want to avoid probate?

A: Probate is time-consuming and expensive. In most states it usually takes a minimum of one year to probate even simple estates. With complex estates, or where the will is contested or other litigation is associated with the estate, the process can take much longer, often two to five years. Probate fees are established by the court, and can either be statutory or “reasonable,” depending upon how complex the probate procedure turns out to be. These fees can run from 2 percent to 8 percent of the value of the property in the estate.

Q: Is there a way to transfer property to my heirs without going through probate?

A: Yes. With will substitutes you can provide for the automatic distribution of your wealth upon death. There are several types of will substitutes you should ask your attorney to consider, including: the laws of descent and distribution, joint tenancies with right of survivorship, life estates, life insurance contracts, pension and profit sharing benefits, and trusts.

Q: What are the advantages and disadvantages of will substitutes?

A: It depends upon the type utilized. Under the laws of descent and distribution, the advantage is that there is no added cost of preparing a document to distribute the property – the state automatically distributes it to the testator’s heirs according to a statutory scheme. The disadvantages are that the testator may not want his property to be distributed to beneficiaries designated by the state, and administration expenses may be higher than for the probate of a will or administration of a trust.

Joint tenancies are advantageous in that they are generally not costly to create. However, there may be major tax consequences in community property states where title is held by a husband and wife in joint tenancy and the property has appreciated substantially in value. This is because when the first spouse dies, his or her interest in the property receives a “step-up” in basis (i.e., is revalued to fair market value), but the surviving spouse’s interest does not. Therefore, if the surviving spouse sells the property, he or she must pay a tax on the portion that did not receive a
step-up in basis.

In contrast, where the property is held as community property when the first spouse dies, the entire property (not just the deceased spouse’s half) receives a step-up basis. If the surviving spouse then decides to sell, he or she will not be confronting the same tax consequences as the first example.

There are also serious disadvantages to non-spousal joint tenancies, especially where it is the intention of parents to transfer real property to their children by operation of law at the parents’ death. A joint tenancy with a child will avoid the probate process, but it also subjects the parents’ interest to the claims of the child’s creditors. Furthermore, if the child dies first, the parents still have the property in their estate. Thus, the purpose for avoiding the probate is thwarted entirely. Another disadvantage is that the creation of a joint tenancy is considered by the IRS to be a gift of a present interest (when created with someone other than a spouse) and therefore may be subject to gift taxes.

Life estates are used when the transferor wants to retain the use and possession of property (i.e., be able to live in a house until his or her death), but the remainder interest is transferred to another (the remainder beneficiary) during the transferor’s lifetime. Upon the transferor’s death, or upon the death of another individual named by the transferor at the creation of the life estate, the title to the property goes to the remainder beneficiary.

The disadvantage of a life estate is that it, like a joint tenancy, subjects the transferor to a potential gift tax if the remainder beneficiary is not a spouse. Furthermore, if the transferor changes his or her mind, the life estate cannot be cancelled without the agreement of the remainder beneficiary, who must assign his remainder interest back to the transferor. Upon such a cancellation, the remainder beneficiary will be subject to gift tax consequences.

Life insurance policies are contracts between the insurer and the insured to pay a certain sum to a named beneficiary upon the insider’s death. The probate court is not involved, as the insurance proceeds themselves are not a part of the insider’s estate. A full range of insurance contracts are available-from term insurance (for purely insurance purposes) to whole life insurance (which combine insurance with a savings program), as well as combinations of these two concepts. Life insurance proceeds may or may not be included in the deceased person’s estate for estate tax purposes, however, depending upon whether the insured during his lifetime retained the right to make certain decisions regarding distribution of the insurance proceeds.

Trusts are by far the most effective will substitutes, for they combine the favorable elements of all these other methods, and can be structured so as to have none of the disadvantages.

Q: What is a trust?

A: A trust is a contractual arrangement by which you, the trustee, transfer the legal title to property to a trust, where the title is held by an individual or entity called the trustee. The property, once transferred to the trust, is then known as the principal, or corpus, of the trust.

The trustee, while holding the legal title to the property must deal with it in strict accordance with the instructions given by the trustee. Even though the trustee has legal title to the property, he does not have the beneficial right to it, unless he is also the beneficiary. The beneficiary is the person named under the trust. He has no legal title to the property, but does have the right to all the benefits, the income, the right to use and all the other beneficial rights of property ownership.

Q: What are the advantages of creating a trust?

A: A trust has several advantages. First, it allows you to control, via instructions to the trustee, your property when you no longer have the legal ownership. Second, a trust does not need to pass property through probate to transfer ownership of title.

Thus, the trust provides a method by which you can transfer property to those people you wish to receive it, without the necessity of going through a probate proceeding. And a properly prepared living trust can reduce or avoid income, estate and gift taxes.

An additional advantage of the living trust is privacy. Since trust documents are not a matter of public record (as is your will when probated), no one can learn the size of your estate or the provisions you have made for your beneficiaries.

Q: Are there any disadvantages to creating a trust?

A: A trust is generally more costly to set up than a will or any of the other probate avoidance methods discussed earlier. The cost, however, must be weighed against savings of estate taxes, probate fees and conservatorship fees. And, although not every estate is subject to probate fees, such fees will almost certainly be greater than those required to create a trust.

Also, after creating the living trust, you must transfer all of your assets into the trust, a documentation procedure that some people find tedious. However, once done, the trust is funded and the purpose of probate avoidance is achieved. Even if you choose not to fund the trust during your lifetime, the estate will – but this will be accomplished through the probate process. In this event, your living trust will become a testamentary trust instead.

Q: Are there different kinds of trusts?

A: Yes, there are several types of trusts, each designed to accomplish various specialized purposes. For example, a revocable trust can be changed or terminated at will by the person creating the trust. An irrevocable trust, once established, cannot be revoked or changed until it terminates according to a specified provision in the trust. A testamentary trust is established by the terms of a will and is administered by the probate court. A business trust is established in lieu of a corporation to hold business interests.

Trusts, such as the “Clifford trust,” often have as a specific purpose the reduction of income taxes. Trusts can also be established for the purpose of avoiding gift taxes and estate taxes, such as trusts for minors and charitable trusts. However, these are very sophisticated trusts and should be drafted only by attorneys who specialize in these types of trusts and are extremely familiar with current federal and state taxes.

The most common trust used is the revocable living trust. It allows you to retain the right to terminate the trust or to change it in any way you choose. You can put additional property in the trust, remove or change trustees, change the beneficiaries, or completely terminate the trust and instruct the trustee to return the property. All of this can be done without incurring either gift or income tax liability.

A revocable living trust provides for a great deal of flexibility. For example, say a husband and wife create a trust, and afterward the husband becomes incapacitated and is unable to manage the family businesses or provide for his own care. The trustee can provide medical care for the husband and take care of his needs from the trust without having a guardian appointed for him or going through any legal proceeding to manage the property in the trust. Upon his death, the trust continues in existence, with the trustee owning the property and continuing to pay the income to
the wife or other beneficiaries. Upon the death of the wife, the property is then distributed under the terms of the trust. It can also provide that in the event of the death of the trustee’s after their children have reached adulthood, the trustee is to distribute the property to the children equally.

However, if one of the children is a minor, or if one of the children has predeceased the trustee’s, leaving minor children of his own, the trust can continue in existence and provide income and protection to that child or grandchild until adulthood. Contrast this to a will created with these same provisions. It would either have to be managed by a court, or the property would have to be distributed to minor children and held in guardianship for them until adulthood.

With a trust, it is the trustee, not the court, who transfers the property to the beneficiaries. The person who creates the trust thus realizes a substantial savings by avoiding an extended (from six months to as long as five or six years) probate proceeding.

In addition, the trust allows the trustee, often a family member or the trustee’s bank, to handle the affairs. This is usually done more in accord with the desires of the surviving family members than would be the case if it were handled by a court proceeding.

In cases where the children may have different financial requirements, or when a child requires special medical and financial attention, a trust can also allow a parent complete flexibility.

Thus, through the vehicle of a trust, a parent can provide maximum protection to his spouse, children and grandchildren.

Q: Considering time and cost, how does the transfer of property to my heirs under a trust compare to the probate process?

A: Since a trust always has a trustee who oversees the actual transfer of your property, the process can be completed in as little as a few weeks. This is usually true if the value of your property is of insufficient value to subject the estate to federal estate taxes. If your estate is subject to federal estate taxes, the distribution of trust property may have to be delayed until taxes have been paid and the IRS approves distribution of the estate.

In any event, the process of distributing assets under a trust will always be much simpler than in the probate process. Also, since this is a non-probate procedure, any attorney’s or accountant’s fees incurred will be based on actual time expended on behalf of the trust, rather than statutory or judicially-determined fees.

Q: Can a living trust protect my children? If my spouse should remarry after my death, I want my children, not a new spouse, to inherit our property.

A: Not only can a trust protect your estate from federal taxes, but it also can protect your estate from any subsequent spouse who otherwise might divert your assets to persons other than those whom you would have chosen.

For example, provisions can be made for the surviving spouse to receive income and principal from the trust, in order to ensure that he or she can continue to live in the manner in which he or she was accustomed. At the surviving spouse’s death, the property in the trust would go to those persons (i.e., children) designated by the first spouse. Thus, the surviving spouse would be sufficiently provided for, and the deceased trustee’s assets would ultimately end up in the hands of his or her beneficiaries. (This provision is only available to those persons who have a properly prepared document executed subsequent to September 12, 1981.)

Q: How can a trust benefit a single person?

A: Not only does a trust provide for a single person the same benefits as married couples, it provides an additional benefit: The living trust can allow a single person to make provisions for his own care in the event of mental or physical disability. This is extremely important, because a single person may not have children or others who would naturally assume such responsibilities.

Q: Can a living trust avoid a guardianship for my minor children?

A: Yes. Both single and married parents can use living trusts to avoid the cost and difficulties of guardianships. Under the laws of all states, persons under a certain age (usually 18) are not deemed competent to hold title or manage property. Through a guardianship, the probate court takes control of the minor’s property and puts it in the hands of an adult individual or corporate fiduciary.

There are many costs and expenses associated with a guardianship. First of all, if more than one child is under the age of majority, separate guardianship procedures are required for each child, resulting in multiple costs.

Second, the guardian must obtain court approval before making any significant decisions relating to the minor’s assets. This requires court hearings and notice to all parties who have an interest in the minor’s affairs, and can result in further expense and delay.

Third, the guardian must give a periodic (usually annual) accounting to the probate court, showing all items of income received by the guardian and listing all expenses incurred by the guardian on behalf of the minor. The court must approve these expenses, or the guardian will not be reimbursed for them. This report is usually prepared by an accountant and presented to the court by an attorney, and their fees are paid from the guardianship funds. The guardian will usually be required to post a bond.

However, without question, the greatest cost of a guardianship is its inflexibility with regard to the needs of minor children. In all states, where proper provision is not otherwise made, division of assets will be made equally among all children regardless of their ages. In a family where some children are adults and others are minors, the adult children will receive assets that may otherwise be used for food, clothing and shelter for the minor children. This deprives the younger children of the protection the adult children received while they were growing up. Also, with guardianship, each child will receive his or her inheritance upon reaching the age of majority. In many cases, this means that an 18-year-old child will be receiving larger sums of money than he is capable of

With a living trust, you can determine the age(s) at which you believe your children would be capable of managing the resources you wish them to receive. Other safety precautions can also be drafted for further protection. For instance, a trust can provide for staggered distributions that require an education be completed, or the establishment of a stable marriage, prior to the receipt of financial resources.

Q: Who should be named as trustee of a living trust?

A: The trustee can be any legally competent person, association or corporate entity, such as a bank or other financial institution that provides trust services. Often, charitable organizations will act as trustees. However, for most families, the husband and wife should act together as their own trustees. Then, when one spouse dies, the surviving spouse can act alone as the successor trustee. If the surviving spouse is unable to do so, or if it is unadvisable for the surviving spouse to act alone (either because of lack of experience or potentially unfavorable tax consequences) a co-trustee can also be named to provide assistance to the surviving spouse. This co-trustee may be a friend, a relative, an association, a bank or trust company, or a charitable institution.

Q: Do I have to give up control over my property when I set up a trust?

A: No. In many states, you can be the trustee and also act as your own trustee. Although there are good reasons for using a bank or trust company as the trustee to manage and control your property (such as financial expertise, independence and the ability to resist pressure from beneficiaries), the law does not require that all trusts be managed by corporate trustees.

The crucial question is this: Do you have the ability required of a trustee to manage the trust’s assets, and do you want to provide that management? If you do, you can act as your own trustee in most states.

Q: Must all of my assets be transferred into the trust?

A: No, but you will only avoid probate on the assets that are owned by the trust at the time of your death. As with all other assets (except for a few specially treated types of assets), if there is a “pour-over” will, the trust will function as a testamentary trust and subject such assets to probate expenses and procedures.

Q: How do I transfer assets into my trust?

A: This is accomplished in the same manner as if you were selling or giving them to the trustee. For instance, where you act as your own trustee, you transfer the title from your name as an individual to your name as trustee of your trust. If a bank, trust company or other person serves as your trustee, you transfer the title of your property from your name as an individual to the trustee of your trust.

Q: Is it complicated to transfer property into the trust?

A: No. For personal property that has no document of title, an assignment that identifies the item and transfers it from trustee to trustee is sufficient. For real property, a new deed is prepared conveying the property to your trustee. It is then recorded in the same manner as any other deed. For bank accounts, a new signature card changing the title from yourself to the trustee of your trust is ail that is usually required.

Similarly, the name of a stock brokerage account is changed from the trustee’s name to the trustee’s name. Most brokerage firms require that the trust document have a specific provision requiring the trustee to maintain margin accounts as appropriate.

Life insurance policies can be transferred into the trust by executing the necessary transfer of ownership documents, or change of beneficiary forms, as provided by the insurance company. These transfers cost little and involve little time or effort.

Q: How does a living trust save income taxes?

A: The normal “grantor living trust” (where the trustee is also a beneficiary) does not avoid income taxes during the trustee’s lifetime. However, if the trust is properly prepared, provisions can be made to distribute trust income among family members after the death of one of the spouses. If the surviving spouse does not require all of the income to meet his or her needs, the overall family’s income taxes can be reduced.

Q: Can a trust save estate taxes?

A: Yes. With the proper tax provisions, a trust can avoid or reduce federal estate taxes and any state inheritance or estate taxes to the minimum amount required. Consult your estate planning attorney.

Q: If a living trust provides so many advantages, why didn’t my attorney tell me about it?

A: Attorneys who are knowledgeable in estate planning generally follow one of two philosophies in their estate planning practices. One philosophy is to do as little as possible during the client’s lifetime, relying on the state probate statutes and procedures to resolve any difficulties after the client’s death. The advantage of this philosophy is that the legal fees required to implement this type of planning are usually not substantial.

The other philosophy is everything that can be done for the client should be done during the client’s lifetime, for the purpose of reducing procedural steps after the client’s death. Attorneys who follow this philosophy utilize living trusts to avoid the costs and delays of probate procedures and conservatorships. Also, with the client alive and available to assist, the attorney and client can preplan and pre-execute the necessary procedural steps.

One of the advantages of this procedure is an obvious and substantial reduction of the attorney’s and executor’s fees, which would otherwise be paid out of the client’s estate. It has the disadvantage, however, of requiring the client to pay higher fees up front, when the document is created. On balance, though, the overall savings to the client’s family can be as much as 50 percent to 75 percent of the probate fees.

Your attorney may not have discussed a living trust with you because many attorneys are simply not estate planning specialists, and thus mistakenly believe the common misconceptions often associated with trusts, such as:

1. When you create a trust you give up control over your property;

2. Your property will be subject to property tax reassessment;

3. You cannot sell or transfer the assets once they are in the trust; and

4. You cannot use the assets as collateral for loans.

Quite frankly, however, the most probable reason that most attorneys don’t advise clients about trusts is because when the clients first meet with their attorneys, they inevitably ask for the “cheapest” estate plan available, not the most effective. Estate planning is an area where you truly “get what you pay for.” That is, if you do not wish to pay for thorough planning you will not receive thorough planning. Therefore, if you are considering an estate plan for yourself and your family, you should be knowledgeable about what is available to meet your needs. In this area of
the law, it is often best not to let your pocketbook be your guide.

Q: What should I know if I am considering charitable contributions?

A: There are six guidelines you should keep in mind in light of the current law.

1. Gifts made by check: Gifts made by check must be mailed by December 31, even if not received by the organization until next year.

2. Gifts of securities: Gifts of securities, properly endorsed or accompanied by properly executed stock powers, also need to be mailed by December 31. The date of hand delivery of securities will be deemed the date of the gift.

To document the year of contribution and value, the date of delivery is very important. You need to know both the date and amount of the contribution.

Don’t give directions to the issuing corporation (or its agent) to reissue the securities in the charity’s name. The date of transfer could be months later than you intended. Remember, long-term securities are deductible at their full fair market value, which makes them good charitable contribution items.

3. Gifts of real estate: The delivery date is the day the charity receives a properly delivered, executed deed.

4. Gifts of works of art and other tangible property: The delivery date is the date the charity receives the property and issues an assignment or bill of sale for the gift.

5. Appraisal: An appraisal is required if the donated property is worth $5,000 or more.

6. Pledges: These are deductible when they are paid. (They can be made with cash or securities, which are deductible at their full fair market value.)

(The above material was published by Focus on the Family, Colorado Springs, CO.)

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