ACCT 5315Estate and Gift Taxation

Introduction to wills, trusts, and other probate procedures

Organization of Class

Hand out resume’ files Hand out glossary of terms related to estates

and trusts. Hand out homework assignment for week 2 Go over glossary of terms. Begin Lecture on Wills, Trusts and Probate

Procedures.

Wills

Generally, the most important instrument in estate plan Will: written statement disposing of property at death executed

by a person during life A will is not operative until death, but is changeable during a

testators life. Who can make a will

– anyone over 18 years old– Must be mentally competent @ time the will is executed– Cannot be under any duress or undue influence at the time the will

is executed

Valid Wills

To be valid a will:– Must be signed.– States vary in level of witnesses needed– Many states require

Signature by the maker and, 2 witnesses neither of which may have a financial interest

in the estate. If any of the witnesses are not valid the will technically does

not exist.

Properly executed wills under one state are valid in all U.S. states and Possessions

Wills (continued)

Testator/testatrix: Persons who makes a will Will provides how the testator’s property will be

distributed The will also names the person or institution who will

carry out the will’s instructions (i.e. the executor/executrix)

If no executor/trix named, probate court will appoint an administrator/trix

Executor=testators personal representative

Wills - continued

Beneficiary - people named in the will to receive property.

If beneficiaries are not of legal age or incompetent – Probate court appoints a guardian ad litem (for the purpose

of the probate proceedings)– Probate court can also appoint a guardian of the property

(cares for the assets of the minor) – Probate court can also appoint a guardian of the person

who cares for the personal attributes of the minor. Generally these two guardians are the same person.

Parent - legal guardian of the person not necessarily the legal guardian of the property

Advantages of a Will

Designates who is to receive property and what property they are to receive

It also designates who receives property in the event that a beneficiary pre-deceases the decedent.

Will can be used to name the guardian of your children - however, can always reserves the right to name the person best for the childe

Names the executor/trix of the estate and can specify that a surety bond not be provided.

Disadvantages of dying intestate (i.e. without a will)

Property is distributed in accordance with the statutory scheme of intestate succession as determined by the state of domicile.

Court appoints administrator rather than decedent determining who he/she wanted.

Children’s guardians may not be the person the decedent’s wished, in particular if the desired guardian is not a direct family member.

Revocation of a Will

Destroy all copies of the will, or Execute a new will including the terms: “By

this will I revoke all prior wills” Automatic Revocation - If married/divorced or

have a child the will is automatically revoked unless specifically stated in the existing will that these events do not revoke the will.

Structure of the Last Will & Testament

Most will have the following components– Exordium Clause– Payments of Debts Clause– Payment of Taxes Clause– Disposition of Tangible Personal Property Clause– Disposition of Residential Real Estate Clause– Specific Bequests & Devises– Powers of Appointment Clause– Residuary Estate Clause

Structure of the Last Will & Testament (continued)

Disposition of Trust Assets Clause Appointment of fiduciaries clause Powers clause Appointment of guardian clause Common disaster clause Survivorship Provision Testimonium Clause Attestation Clause

Exordium Clause

Identifies the testator Declares domicile - avoids state conflicts Declares instrument to be his/her last will and

testament - negating prior wills Specifically invalidates all prior testamentary

instruments.

Payment of Debts Clause

Directs the payment by the executor of debts, funeral expenses, and the costs of administration

Directs the source from which such amounts are to be paid (usually from the residuary estate).

Establishes as debts any items which might not otherwise appear to be binding obligations of the testator (e.g., a loan from a child, business partner, etc.)

Covers explicitly the method of any payment of secured debts (e.g. whether a mortgage on improved real estate including the personal residence should be settled)

Payment of Taxes Clause

Establishes source of funds and allocation, if any, for the payment of death taxes.

Identifies all potential tax liabilities and allocates responsibility for these.

Identifies those bequests that may need to be specifically exempted from the tax allocation provision (marital assets)

Completes tax projection to prevent depletion of residuary estate.

Provides immunity from liability to the executor or trustee who exercises discretion in allocating taxes.

Disposition Of Tangible Personal Property / Residential Real Estate Clause

Provides for the disposition of specific TPP items (jewelry, artwork etc)

Can be used to recognize the community property interest of the surviving spouse in such property by indicating that one half of the TPP belongs to the spouse

Can be used to itemize separate property - confirming those items that are not community property items.

Residential Clause - can provide for a transfer of outright ownership or a life estate in the testator’s residential real estate. Guarantees that the property will be transferred to the appropriate person in the form desired.

Specific Bequests/Devises and Powers of Appointment Clauses

Specific Bequests / Devises– Designates specific items to go to certain beneficiaries– Items include, cash, stocks, other securities, TPP etc.

Powers of Appointment Clause - Provides for– an identification of the source and date of any power of

appointment held by the testator, and the property subject to that power, and

– the exercise, limited exercise, nonexercise or a statement of prior disclaimer of this power of appointment.

Residuary Estate Clause

Provides for the disposition of the residuary estate and can achieve the following

the outright disposition of all remaining assets the transfer of all remaining assets to a testamentary trust the transfer of all remaining assets to a previously created inter

vivos trust the maximum use of the unlimited marital deduction disposition of the remaining community property including a

widow’s election the implementation of generation skipping transfer provisions in

any testamentary trust.

Disposition of Trust Assets/ Appointment of Fiduciaries

Trust Disposition– Provides the terms for the retention, investment, and

disposition of the income and corpus of marital and non-

marital testamentary trusts. Appointment of Fiduciaries

– designates executor and trustees of testamentary trusts– waives the posting by the fiduciary of a bond to assure

performance by the fiduciary– enables the payment of appropriate compensation to the

fiduciaries.

Powers Clause

Vests authority in the fiduciary to deal with the property held by the decedent at the time of death including

retaining property / selling and leasing property investing and reinvesting estate assets/ managing real est. consenting to corporate and partnership adjustments allocating receipts and disbursements between princ./ int. lending and borrowing funds, settling claims exercising employee stock options / distributing property in kind

/ exercising other powers appropriate to a fiduciary finding federal/state income tax returns

Other Clauses

Appointment of Guardian - – Designates the person to act as the guardian of person and

property of any minor children when the decedent dies and the minor children have no surviving parent.

– This designation may be done by a separate document.

Common Disaster Provision– Serves to indicate which spouse is deemed to survive if

both spouse dies in a common disaster. This provision is for purposes of determining transfer of spousal assets..

Will Clauses Continued

Survivorship Provision - – Specify that beneficiaries must be living for a minimum of

30-60 days after the testator’s death to be treated as surviving the testator. Prevents double taxation.

Testimonium clause– Establishes that the testator executed the will with full

knowledge and intent that it be his last will & testament– establishes the date of document and signs the doc.

Attestation Clause - Provides assurance with local laws regarding wills (e.g. witnesses etc.)