The ABCs of Wills

Any individual, who aspires to practice estate planning or elder law, must be proficient in the areas of will drafting, trusts, and basic taxation. One of the fastest growing areas of litigation throughout the country is will contests. The primary reasons for this growth are: (1) the increase in our elderly population and (2) inadequate preparation of estate planning documents. The latter reason stems from the fact that many attorneys utilize a boilerplate approach to estate planning, believing that “one will fits all.” This problem is also found in the utilization of trust mils and computer programs.

Competent attorneys recognize that individual and financial factors must be evaluated prior to preparing a will. An evaluation of these factors will determine what clauses should be utilized in drafting a will, whether a living trust should be utilized as an alternative to a will, and the extent to which federal and state death taxes must be addressed. The focus of this article is on the proper recognition of estate planning issues and competent drafting of wills.

The will is the centerpiece of estate planning. It provides for the legal transfer of assets upon an individual’s death, names an individual or entity to settle the probate estate, names a trustee to administer any testamentary trust established therein, and appoints a guardian for any minor or disabled children. However, it is not the only estate planning document nor does it dispose of all assets.

There are three basic estate planning documents: (1) a will, (2) an advance directive, and (3) a power of attorney. Due to the continued increase in the elderly population, as well as the commensurate growth in medical costs (most notably, nursing home costs), it is imperative to prepare all three documents for clients. Simply put, a will may have little value if an individual’s estate is dissipated by such expenses. A properly prepared advance directive and power of attorney can minimize the severity of these costs.

Moreover, it is imperative to recognize that a will does not necessarily dispose of the entirety of an individual’s estate. It only disposes of the probate estate, which primarily consists of assets owned by an individual in his or her sole name. Assets which are owned with a right of survivorship or beneficiary designation pass outside of a will. Thus, an attorney must evaluate the manner in which assets are held to ensure that the testamentary intentions of the client are met.

An individual who dies without a will subjects his or her estate to the laws regarding intestacy. Intestacy is a state’s statutory scheme governing the disposition of any estate and the direction of its administration absent a valid will. In many states, intestacy laws demonstrate the need for individuals to execute wills. For example, some states divide probate property between children and surviving spouse although there are very few wills that would ever be prepared with such a division. Whether or not an individual has children from a prior marriage or relationship will effect this division.

Disposition of Assets
A prerequisite of will or trust drafting is an understanding of how assets pass from an individual to his or her heirs. In general, property may pass from an individual in four ways during lifetime or at death:

(1) Lifetime Gifts – An individual may transfer, by gift, part or all of his or her property during lifetime. Gifts can be made for a variety of reasons, ranging from simple benevolence to a desire to minimize death taxes. Gifts can be made outright or into a trust.

From a basic standpoint, there are three forms of gifts. One form of gift is that which qualifies for the federal annual exclusion (currently $13,000 per year per donee). Pursuant to the Taxpayer Relief Act of 1997, this amount increases from the long-standing amount of $10,000, in increments of $1,000, as indexed for inflation, commencing retroactively from January 1, 1998. The second form of gift involves gifts in excess of the annual exclusion amount. Such gifts require either the payment of a tax, or a reduction in the exemption amount which can pass free from federal estate tax at an individual’s death. The first two forms involve gifts of present interests. The third form is the gift of a future interest, which can range from the transfer of a remainder interest in real property by a deed to a sophisticated tax planning trust, such as a Qualified Personal Residence in Trust (QPRT) or a Grantor Retained Annuity Trust (GRAT).

When gifts are made, a donor should be aware of the concepts of basis. Gifts, made during lifetime, will be accepted by the donee with the same basis as received by the donor. This particularly impacts gifts of stock and real property which are subject to capital gains taxation upon sale. If held until death, these assets receive a “step up” in basis so that the donee’s basis will be the value of the asset on the donor’s date of death.

(2) Joint Ownership
There are three forms of joint ownership: tenancy by the entirety, joint tenancy with right of survivorship, and tenancy in common. An interest in property, held as a tenancy in common, will pass through an individual’s probate estate. However, a tenancy by the entirety automatically passes to an individual’s spouse upon death. Likewise, a joint tenancy with a right of survivorship passes to a surviving interest holder upon the passing of the first interest holder.

(3) Contract Assets
By contract, two sets of assets do not pass through probate. One set involves assets which have beneficiary designations. These assets include retirement plans, individual retirement accounts, life insurance, and annuities. The second set involves assets which have designations for transfer upon death. These include pay on death (POD) and transfer on death (TOD) accounts.

(4) Probate Assets
Property, held in an individual name, shall pass into an individual’s probate estate upon death. Such property shall pass either through a valid will or, in the absence thereof, the laws of intestacy.

Statutory Basics
In order to prepare a will, an attorney must review the statutory requirements of the state in which the testator resides. These requirements will vary from state to state. In general, they will set forth a minimum age requirement for a testator (typically, eighteen years of age) as well as the number of witnesses required to ensure the validity of a typewritten will or to make same self-proving.

In some states, a holographic will is recognized. A holographic will is one which is written entirely in the hand of the testator and typically does not require witnesses. Some of the state limit the use of holographic wills such as restricting their acceptance to members of the armed services serving overseas. In many states that do accept holographic wills, a formal court proceeding must be held in order to determine if it will be admitted to probate.

In all states, a testator must have legal capacity to execute a will. Capacity is contextual; as such, the standard to execute a will varies from that to execute a contract or to be determined as incapacitated in a guardianship proceeding. In general, testamentary capacity is a four-prong test. The testator must know: (1) the objects of his affection (i.e. his beneficiaries), (2) the nature of his bounty (i.e. the type and extent of his holdings), (3) the document that he is executing (i.e. a will), and (4) the interrelation of the first three factors. In most states, there is a strong presumption to uphold wills. As such, the threshold to maintain testamentary capacity in will contests is typically slight.

Intake Information
Many wills are deficient because they are boilerplate in nature. A will cannot be properly drafted unless an attorney understands the personal background of the testator. This background will reveal whether or not special needs and circumstances exist, such as children from a previous marriage, disabled or mentally ill beneficiaries, or spendthrifts. Moreover, it is imprudent to draft an estate plan without knowing a testator’s financial background. This background will allow an attorney to ascertain whether there are non-probate assets and the extent they will affect a testator’s overall estate plan. In addition, this information is necessary to determine the potential effect of the federal estate tax and state inheritance taxes upon an individual’s death.

When gathering intake information, an attorney should acquire the following information:
– the full name and address of the client(s), as well as their date of birth, medical condition, and whether or not they are a United States citizen;
– the names, addresses, and ages of children and any other estate beneficiary;
– the names and addresses of any individual or entity which the client may wish to act in the capacity of executor, trustee, guardian, health care representative, and agent under a general durable power of attorney; and
– a complete list of the client’s assets and liabilities.

Naming Fiduciaries
There are three primary fiduciaries that can be named in a will. In every will, an executor is named. In some states, this role is referred to as the personal representative. The executor can be an individual or a corporate entity, or a combination of both. The role of an executor is to marshal the decedent’s assets, pay any liabilities lawfully assessed to the individual or his estate, and to distribute the net estate to the estate beneficiaries.

When the beneficiary is a trust, rather than an individual, a trustee should be appointed. A trustee administers and makes payments from a trust to the trust beneficiaries, which may be either individuals or charities, subject to the directions set forth in the will. Like an executor, a trustee may be either an individual or a corporate entity, or a combination of both.

When an individual has minor children, or has a disabled adult child, a guardian may be named. In the case of a minor child, the role of the guardian is to make personal and medical decisions on behalf of a decedent’s minor child until that child attains the age of majority. Many individuals mistakenly believe that the guardian has a financial role as well. This assumption is flawed. Funds for a minor child are managed in trust by a trustee. The client may decide whether or not the guardian or trustee be the same or different.

In the case of a disabled individual, a guardian is typically named as persuasive evidence to name an alternate guardian when a testator dies. Basically, when an individual becomes an adult, he or she is generally recognized as emancipated even if he or she is mentally incapacitated. Parents can become legal guardians upon application to the court system. In order to name a successor guardian, in the event of the parents’ death, a preference may be stated in the will.

A prudent attorney should distinguish between the aforementioned roles to his or her clients. Moreover, the attorney should discuss the need for a client to make wise choices. Many executors are chosen because of their age, gender and proximity to the decedent. Such selections are inappropriate as none detail the qualifications needed to fill the fiduciary role. An attorney must emphasize the need to appoint a qualified representative rather than merely asking for a name.

Types of Bequests
There are four types of bequests which may be made in a will: (1) specific bequests, (2) demonstrative bequests, (3) general bequests, and (4) residuary bequests.

Specific Bequests – Specific bequests are those that allocate a particular asset to a particular beneficiary. This bequest can include personal effects, jewelry, collectibles, automobiles, and real property, among other items. In many estates, with the exception of real property and liquid assets, such bequests may be made by a handwritten note or memorandum rather than in the will itself. In the general will, a clause should be used to dispose of personal effects not mentioned in any such note or memorandum. This clause should either provide for the disposal or sale of such property. If such property is to be divided among estate beneficiaries, such as children, such shares should be approximately divided subject to the discretion of the executor in the event of a disagreement over who shall take a particular item. This particular direction is important as it is virtually impossible to divide property equally.

Demonstrative Bequests – These bequests include precise distributions from or of a particular asset. Examples would include “100 shares of General Electric stock” or “$10,000 to be paid from my mutual fund at Salomon Smith Barney”. An attorney must be very careful to ascertain the intent of his client in the event this particular asset is sold or is subject to a change in name. When distributing stocks or funds, it is advisable to state that the bequest of the stock in a company shall survive in the event the company is acquired by another entity.

General Bequests – A general bequest is a precise dollar amount not designated from any asset. In making such a bequest, as well as a specific or demonstrative bequest, an attorney should evaluate the need to adjust this bequest should the value of an estate increase or decrease. For example, if a client is concerned that his or her assets may dissipate, the attorney can draft language tying in the bequest to a percentage of the estate as a limit. As such, if the size of the estate decreases substantially, the bequest can be adjusted downward as well. This drafting philosophy is important in protecting the distribution to the residuary beneficiaries who are typically the most important to the client.

Residuary Bequests – This bequest includes all property not disposed in the other three forms of bequests and usually represents the bulk of the estate.

Contingent Beneficiaries
In the event a beneficiary predeceases the client, direction must be given as to the disposition of property. As such, an attorney should note whether contingent beneficiaries will inherit or whether the bequest shall lapse.

Tax Allocation
As indicated throughout this writing, taxes are imposed upon an individual’s estate upon death. It is imperative that a will contain a clause which allocates the responsibility of taxes. The estate taxes – both federal and state – are generally considered the obligation of the testator and paid by his or her estate. In determining whether such taxes are to be assessed, both probate and non-probate assets are to be considered. However, the Internal Revenue Service initially looks to probate assets for payment of this tax as do the states for their levies. Thus, an attorney must calculate estimated tax when undertaking estate planning for a client and set forth the manner in which assets will be distributed from contract assets, assets with right of survivorship, and probate assets.

Many states impose an inheritance tax. Like the estate tax, it is a levy based on the value of both probate and non-probate assets. Unlike the estate tax, it is a levy on the beneficiary. As such, the taxes do not necessarily have to be paid from probate funds. In addition, the tax may be imposed upon each beneficiary’s share of the probate estate rather than from just the residuary.
Common Drafting Considerations

Many attorneys frequently utilize boilerplate documents which do not adequately discuss routine situations which may occur. For example, many wills only name one executor. In the event the executor predeceases the client, it is preferable to have a successor executor named. In addition to a spouse, two successor executors should be named. Likewise, at least one successor trustee and one successor guardian should be named when such roles are used.

Perhaps, the biggest area of concern involves the treatment of minors. Many testamentary documents state that the share of a minor is to be held in trust upon attaining an age such as eighteen (18) or twenty-one (21). In addition, such wills shall neglect to appoint a trustee. As indicated previously, a trustee should be appointed in this situation. Moreover, a sober analysis should be undertaken to determine the appropriate age for distribution. A prudent attorney should note that the age of majority does not necessarily equate with an age of maturity. On the other hand, principal may need to be distributed for health, education, maintenance, support, and other objectives of the client. In light of the foregoing, the attorney should note that distributions for the needs of a minor should be made, but that outright distributions of principal will be stayed until a more mature age such as thirty (30) or thirty-five (35).

Special Needs and Circumstances
When drafting a will, an attorney must recognize that individuals have different backgrounds. In an initial client interview, an attorney must determine whether the special needs or circumstances exist. These needs and circumstances include, but are not limited to:

(1) Disabled beneficiaries – Outright bequests to disabled beneficiaries may disqualify them from government benefits which they are receiving and may be mismanaged in the event the disability is mental. However, a special needs trust can be established to protect a bequest for a disabled beneficiary while maintaining his or her government benefits. This trust may be testamentary or it can be established as a stand-alone document.
(2) Spendthrifts – Occasionally, families have a child who has significant financial problems. This definition can vary from a child who merely lives paycheck to paycheck to one who is beset with judgments or bankruptcy. Individuals with mild problems can have their distributions staggered, but more serious cases warrant the use of a spendthrift trust. A spendthrift trust can provide support for a spendthrift. However, the trust assets will not be subject either to the claim of creditors or the poor habits of the spendthrift child.
(3) Second marriages – This issue arises far too often. In the case of a second marriage, where both spouses have children from a prior marriage, simple wills are ill-advised. If one spouse leaves the entire estate to the survivor, then the surviving spouse frequently will distribute most, if not all of the combined estate to his or her own children, leaving little or no assets for the family of the spouse who died first. A distribution in a trust, such as a Q-Tip Trust, can ensure that a surviving spouse will have economic protection yet allow for any remaining principal and interest to be distributed among the decedent’s family.
(4) Non-citizen spouses – non-citizen spouses do not qualify for the unlimited marital deduction. In order to accommodate the competing needs of such a spouse, who would like access to the decedent’s assets, and the Internal Revenue Service, which would like to tax any assets of a decedent in excess of the applicable exemption amount, a Q-DOT trust may be established to provide for access to funds by a non-citizen spouse until their death so long as there is an independent trustee and location of trust assets within the United States.



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