mini-course series - estate planning (part 3)

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MINI-COURSE SERIES

ESTATE PLANNING

Part III

ESTATE PLANNING 1

PART III

IBF | MINI-COURSE SERIES

WILLS

A will is what many people think of when they first consider estate planning. Everyone

should have a will, whether or not they make a more extensive estate plan. A will

specifies who gets property covered by that document when one dies. A will can also

serve other vital purposes, such as appointing a personal guardian. Property left by a

will must normally go through probate. If a client prepares a thorough estate plan

and arranges to avoid probate for all property, he should still have at least a simple

will (a backup will) for the following reasons:

To leave property generally best left by will. Some types of property are not suitable to

leave by living trust and often do not work well with other probate-avoidance devices. The

most common example is a car. Living trusts do not work well for cars, because most insur-

ance companies are unwilling to insure a car owned by a trust; the companies claim they

cannot tell who is authorized to transfer the car. Occasionally, another probate-avoidance de-

vice can be used for a car—owning it in joint tenancy or holding the title in a transfer-on-

death registration. Most people simply leave their car or cars as part of their will property.

To dispose of suddenly acquired property. Anyone may end up acquiring valuable proper-

ty at or shortly before death, such as a sudden gift or inheritance, winnings, or even a lottery

prize. If a client has a will, that property will go to the residuary beneficiary, who, by defini-

tion, takes the rest of the property—everything not left to some named beneficiary. There is

no easy way to leave leftover property through a living trust, because property must be

formally added to the trust for it to be subject to the trust provisions.

To dispose of property not transferred by a probate-avoidance device. If one buys prop-

erty but does not title it in the name of the trust, a will is a valuable backup device, ensuring

that the property will go to whomever one wants to have it (the residuary beneficiary) and not

pass under state law.

To name a personal guardian for minor children. If there are minor or incompetent chil-

dren, the client will need a will to name a personal guardian for them. In the vast majority of

states, the client cannot use any other device for this purpose (guardians for minors were dis-

cussed earlier).

To leave property the client does not currently own but expects to receive. If someone

has left the client property by will and that property is still enmeshed in probate when the cli-

ent dies, the client cannot arrange to transfer it by a probate-avoidance device, such as a liv-

ing trust, because the client does not have title to the property. Under a will, that property

goes to the residuary beneficiary.

Similarly, if one expects to get money from a lawsuit settlement, only a will can be used to

transfer that property. Of course, no one knows what property they might receive shortly be-

fore death, which is one reason to have a will.

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PART III


To disinherit a child or spouse. A client can expressly disinherit a child in a will (detailed

earlier). A client can disinherit a spouse in the will only if he lives in a c/p state.

To name the executor. In the will, your client names the executor, the person with legal au-

thority to supervise distribution of property left by the will and to represent the estate. It is a

good idea to have an executor even if there is a living trust and a named successor trustee be-

cause financial institutions can be reassured to know an executor exists.

In case probate is not required. Some states do not require probate, or greatly simplify pro-

bate, for small or modest estates. If the estate qualifies for simplified treatment, there may

be no need to use a series of probate-avoidance devices—a will may be enough.

EFFECTS OF MARRIAGE

Changes in testator’s family circumstances after execution of a will may operate to re-

voke the will, in whole or in part, by operation of law. Despite testator’s lack of action,

the law presumes an intent to revoke in certain situations. Half the states have no stat-

ute dealing with the effect of marriage on a previously executed will. In those states,

marriage has no effect on an earlier will; the rationale is the new spouse is given ade-

quate protection by a state’s elective share statute (or, by the c/p system).

Effect of Marriage on Previously Executed Will

States without statutes Subsequent marriage has no effect on will.

States with statutes

Majority view—Will is partially revoked to give

spouse amount equal to her intestate share; remaining

assets are disposed of by the will. Spouse will not

receive intestate share if she is provided for in the

will.

Minority view—Will is entirely revoked.

Uniform Probate Code Will is partially revoked to give spouse her intestate

share—but only to the extent it does not reduce gifts

to testator’s children from a previous marriage.

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PART III


MAKING A WILL LEGAL

• Client must be at least 18 years old and be of sound mind.

• Will must be typewritten—either typed or printed out from a computer.

• Will must have at least one substantive provision.

• Client must appoint at least one executor.

• Client must date the will and sign it in front of two witnesses.

The most common substantive provision leaves some or all the property to whomever

the client wants. Witnesses need only be adults and of sound mind (witnesses cannot be

people who are beneficiaries in the will).

Witnesses watch the client sign his will and then sign it themselves. They must be told it

is the client’s will they are signing, but they do not have to read it or be told what it con-

tains. There is no requirement a will be recorded or filed with any governmental agency;

it does not have to be notarized. The client may want to use a notary when signing the

will and having it witnessed. In most states, having the witnesses sign a brief statement

called a self-proving affidavit, which is then notarized, can eliminate any need for a wit-

ness to testify at later probate proceedings.

Codicil A codicil is an amendment to a will; it is a separate document that must meet all the legal

requirements of a will. A codicil may be executed like a statutory will, which must be

signed, witnessed, and notarized. The purpose of a codicil is to modify, explain, or

amend a will. When admitted to probate, it becomes part of the will.

Functions of a Will

Dispose of testator’s property Appoint a personal representative

Disinherit an heir (some states) Appoint a guardian for a child

Create a testamentary trust Exercise power of appointment

Amend or revoke an earlier will Make an anatomical gift

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PART III


TYPES OF WILLS

A handwritten will (holographic will) must be written, dated, and signed entirely in the

handwriting of the person making the will. It does not have to be witnessed. Handwrit-

ten wills are not legal in many states. They are generally not recommended even in the

states where they are legal. Probate courts traditionally have been very strict when exam-

ining handwritten wills after the death of the writer. Since a handwritten will is not nor-

mally witnessed, judges sometimes fear that it might have been forged. A judge may re-

quire proof the will was actually and voluntarily written by the deceased, which some-

times is not easy to do.

A pour-over will is one that directs property subject to it into a trust. For example,

sometimes people make living trusts beneficiaries of their wills. When the will property

is poured over to the trust, the trust controls who receives that property.

It is not usually a good idea to use a pour-over will with a basic living trust. Pour-over

wills do not avoid probate. All property left through a will—any kind of will—must go

through probate, unless the amount left is small enough to qualify for exemption from

normal probate laws. Probate is not avoided simply because the beneficiary of a will

is a living trust.

It is generally better to use a backup will to take care of what is leftover (not in a liv-

ing trust) property. A backup will can name the people the client wants to get property

and skip the unnecessary extra step of pouring the property over to the living trust after

the client’s death.

When used as a backup will, a pour-over will actually has a disadvantage standard

wills do not: it forces the living trust to go on for months after death; property left

through the pour-over will must go through probate before it can be transferred to the

trust. Usually, the property left in a living trust can be distributed to the beneficiaries, and

the trust ended, within a few weeks after death.

Pour-Over Will There are two situations wherein it may make sense to use a pour-over will: [1] if an AB

living trust was set up to save estate taxes (each spouse writes a pour-over will, leaving

his will property to the AB trust) and [2] if a living trust includes a child’s trust (the client

may want any property the child inherits through the will to pour over into that trust).

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PART III


Statutory Wills

A statutory will is a preprinted fill-in-the-blanks form authorized by state law. Califor-

nia, Maine, Michigan, and Wisconsin have statutory wills. In theory, statutory wills

are an excellent idea—inexpensive, easy to complete, and reliable. In practice, statutory

wills are often too limited in scope. The choices provided in the statutory forms are quite

narrow and cannot legally be changed—the client cannot customize it to fit a situation or

change it at all.

Normally, statutory wills are useful only if the client is married and wants all or the bulk

of the property to go to the spouse (or, if she predeceases client, in trust for minor chil-

dren). Because of their limitations, no state has adopted them since the late 1980s.

Other Types of Wills • Oral wills. Oral wills (nuncupative wills) are valid in a minority of states and, even

where valid, are acceptable only if made under special circumstances, such as the will

maker’s perception of imminent death on the battlefield or in some other unusual circum-

stance. They are not to be relied on as a serious estate planning device.

Electronic wills. Only Nevada authorizes an electronic will. An electronic will refers to an

original will created and stored exclusively in an electronic format—usually on a computer.

The will must use advanced technology to create a distinctive electronic signature and at least

one other way to positively identify the will maker, such as a fingerprint, retinal scan, or

voice or face recognition technology. There are currently no readily available or acceptable

methods for making an electronic will that is trustworthy and valid. Nevada is laying the

groundwork for a time when such wills will be easy to prepare. When that time comes, other

state laws are likely to follow.

Video or film wills. Video or film wills are not valid under any state’s law. But films of a

person reciting will provisions, such as to whom they are leaving property, can be useful evi-

dence if a will is challenged, demonstrating the will maker was of sound mind and not under

undue influence.

Joint wills and contracts to make a will. A joint will is one document made by two people,

usually a married couple. Each leaves everything to the other, and then the will goes on to

specify what happens to the property when the second person dies. A similar method for con-

trolling both spouses’ property is called a contract to make a will. Each spouse agrees by

contract to make a will and not revoke gifts to specified beneficiaries, even after one spouse

has died.

Joint wills and contracts to make a will prevent the survivor from changing his mind

about what happens to the property, even if circumstances change drastically. A joint will

or contract to make a will to control property of a surviving spouse is not recommended.

If your client wants to impose controls over property left to a spouse, the sensible way to

do it is through a trust.

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PART III


Living wills. A living will (health care directive) has no relation to a conventional will. A

living will is a document in which one states whether or not they want their life artificially

prolonged by use of life-support equipment. Depending on state law, other issues related to

health care can also be covered.

PROPERTY NOT COVERED BY A WILL

In almost all cases, property transferred by a probate-avoidance device cannot also be

transferred by will. Once property is placed in one of the following forms of ownership,

listing that property in a will has no effect:

property in a living trust that goes to the beneficiaries named in the trust

joint tenancy (if all tenants die simultaneously, a share can be left by will)

money in informal bank account trusts or pay-on-death accounts

life insurance proceeds payable to a named beneficiary

qualified retirement plans and IRAs with a named beneficiary

CHALLENGING A WILL

Will challenges, particularly successful ones, are very rare. The legal grounds for con-

testing a will are limited to extreme circumstances. Basically, a will can be invalidated

only if one were under age when it was made, mentally incompetent or procured by

fraud, duress or undue influence.

Forgetfulness or even the inability to recognize friends does not by itself establish inca-

pacity. The courts presume the will writer was of sound mind; a challenger must

prove incapacity. Similarly, a will is rarely declared invalid on grounds it was procured

by fraud, duress or undue influence; this requires proof some evildoer manipulated a per-

son in a confused or weakened mental or emotional state. If a will maker is improperly

influenced, a court is the right place to remedy the injustice.

If important circumstances change, a client may need to revise his will. In some states, if

one gets divorced after making a will, the provisions that left property to the former

spouse are automatically revoked. But that is not true in all states, and it is not true for

some kinds of property, such as ERISA pension benefits. In any case, one should always

revise a will and bring the estate plan up to date after a divorce. Never rely on state

law for estate planning, especially for matters concerning an ex-spouse.

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Effect of Testator’s Divorce on Gifts to Former Spouse

Testamentary

Gifts

Divorce or annulment automatically revokes all provi-

sions in favor of the former spouse; it does not affect any

provisions in favor of the former spouse’s kin (except in

states that have adopted the revised UPC). In some states,

the couple’s remarriage revives any provisions in favor of

the former spouses.

Non probate

Transfers

Divorce or annulment does not affect any beneficiary des-

ignations in favor of the former spouse—the insured must

change the beneficiary designation. In some states, the

designation is revoked and the former spouse is treated as

having predeceased the insured. Beneficiary designations

under employee retirement plans governed by ERISA are

not revoked upon divorce in any state.

If your client has a child or gets married after the will is made, it should be revised. A

will signed in one state remains valid if the client moves to another state. However, it

is often advisable to draft a new will after a permanent move. Some states place extra

rules on out-of-state executors.

Procedure for Will Contests

Who can contest? Intestate heirs who would receive less under the will

than under intestacy and heirs under an earlier will

who will receive a lesser amount under the new will.

Who cannot contest? Creditors and executors named in earlier wills plus heirs.

What is the deadline? When the will is admitted to probate or later, within the

statutory period. Under UPC, the will must be contested

within 3 years of death or within 12 months after

completion of an informal probate.

Burden of proof? Contestant must establish grounds for a will challenge.

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PART III


THINGS TO DO

Your Practice

Consider co-sponsoring a seminar with one or more estate planning lawyers. While

they talk about the legal ramifications of wills and trusts, your focus can be on show-

ing the long-term effects of compounding as well as investment vehicles that can in-

tegrated into an estate plan.

The Next Installment

Your final installment, Part IV, will cover probate and probate avoidance devices.

You will receive Part IV in a week.

Learn

Are you ready to take your practice to the next level? Contact the Institute of Business &

Finance (IBF) to learn about one of its five designations:

o Annuities – Certified Annuity Specialist®

(CAS®)

o Mutual Funds – Certified Fund Specialist® (CFS

®)

o Estate Planning – Certified Estate and Trust Specialist™

(CES™

)

o Retirement Income – Certified Income Specialist™

(CIS™

)

o Taxes – Certified Tax Specialist™

(CTS™

)

IBF also offers the Master of Science in Financial Services (MSFS) graduate degree. For

more information, phone (800) 848-2029 or e-mail [email protected].

mailto:[email protected]

mini-course series - estate planning (part 3)

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