MINI-COURSE SERIES
ESTATE PLANNING Part III
Copyright Š 2012 by Institute of Business & Finance. All rights reserved.
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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 insurance 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 device can be used for a car—owning it in joint tenancy or holding the title in a transfer-ondeath 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 property 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 definition, 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 property 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 children, 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 discussed 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 client dies, the client cannot arrange to transfer it by a probate-avoidance device, such as a living 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 before death, which is one reason to have a will.
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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 authority 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 because 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 probate, 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 revoke 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 statute 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 adequate 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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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 contains. 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 witness 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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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. Handwritten 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 examining handwritten wills after the death of the writer. Since a handwritten will is not normally witnessed, judges sometimes fear that it might have been forged. A judge may require proof the will was actually and voluntarily written by the deceased, which sometimes 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 living 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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Statutory Wills A statutory will is a preprinted fill-in-the-blanks form authorized by state law. California, 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 children). 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 circumstance. 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 evidence 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 controlling 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. PART III
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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 contesting 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 incapacity. 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 person 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 provisions 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 designations 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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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 showing the long-term effects of compounding as well as investment vehicles that can integrated 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 o o o o
Annuities – Certified Annuity Specialist® (CAS®) Mutual Funds – Certified Fund Specialist® (CFS®) Estate Planning – Certified Estate and Trust Specialist™ (CES™) Retirement Income – Certified Income Specialist™ (CIS™) 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 adv.inv@icfs.com.
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