Wills, Intestacy, and Estate Planning CHAPTER THIRTY-FOUR Wills, Intestacy, and Estate Planning

The Purpose of a Will A will is legal document that allows a deceased person to direct how his/her business affairs will be concluded, debts paid and remaining assets distributed. A person who has a valid will at death is said to have died testate. Testator (male) or testatrix (female): person making the will Estate: the property interest that a person holds at death Copyright © Houghton Mifflin Company. All rights reserved.

The Purpose of a Will (continued) The manner of property distribution depends upon whether a person has a will. When a person dies testate with a will courts will usually try to distribute property in accordance with the deceased’s wishes. Those who die without a will are said to die intestate (no will). People who die intestate have their assets distributed according to state statutes. When a person dies intestate assets are distributed without regard to the person’s wishes. Copyright © Houghton Mifflin Company. All rights reserved.

Portions of a Will The portion of a will that disposes of property can take many forms: Residuary gift: a gift by will of the entire estate to one or more persons Devise: a gift of specific real property Legacy (bequest): a gift of specific personal property Beneficiary: person who inherits property Copyright © Houghton Mifflin Company. All rights reserved.

Beneficiaries If a beneficiary dies before the testator or testatrix, the gift to that person will lapse (not be effective) unless: The beneficiary is a certain kind of relative of the testator/testatrix: Child Grandchild Sister or brother The beneficiary died leaving a descendant. Copyright © Houghton Mifflin Company. All rights reserved.

Beneficiaries (continued) The estate can be distributed either per stirpes or per capita. Per stirpes: the heirs of the deceased beneficiary will share the gift that would have been made to the deceased beneficiary. Per capita: each beneficiary will receive an equal share of the distribution. The method used will depend upon the language used in the will and the court’s interpretation of that language. Copyright © Houghton Mifflin Company. All rights reserved.

Requirements of a Valid Will The person making the will must: Have the physical, mental capacity and age to make a will Usually the age can be from 18 to 21 depending upon the state. Be free from: Fraud Duress (threats) Undue influence Copyright © Houghton Mifflin Company. All rights reserved.

Requirements of a Valid Will (continued) Written form: Generally, a valid will must be in writing. The will must be signed by the person making the will. The maker should initial every page of the will. Witnesses: Generally, most states require that a will be witnessed by two or three people. They should sign the will attesting to the fact they witnessed the maker freely sign the will. A witness cannot be a beneficiary of the will. Copyright © Houghton Mifflin Company. All rights reserved.

Special Wills Holographic will: a written will Completely in the maker’s hand writing Signed by the maker Dated Some states will recognize a holographic will, but some states will not. Nuncupative will: an oral will It is valid only if made during a maker’s final illness. It must be made in the presence of witnesses. After the maker’s death, it must be put in writing and signed by the witnesses. Some states will recognize a nuncupative will, but others will not. Copyright © Houghton Mifflin Company. All rights reserved.

Limitations on Disposing of Property by Will When a married person dies, the surviving spouse may choose to ignore the will and take a portion of the estate. The will cannot require people to act in a manner contrary to public policy. A person cannot be forced to remain single to receive a gift under a will. This would be against the public policy of supporting marriage. If a charitable gift is made and the charity no longer exists: The court, under the cy pres doctrine, will choose another charity that comes close to what the maker of the will wanted. Copyright © Houghton Mifflin Company. All rights reserved.

Limitations on Disposing of Property by Will (continued) A will may only dispose of property that is solely in the name of the maker of the will. If property is jointly owned, it cannot be disposed of by will. Life insurance and pension benefits are paid to beneficiaries named in the policy or pension plan records. Copyright © Houghton Mifflin Company. All rights reserved.

Limitations on Disposing of Property by Will (continued) Certain obligations must be paid on death: Debts Estate taxes Funeral expenses Costs of administering the estate These debts must be paid prior to making any distributions of property to beneficiaries or heirs. Copyright © Houghton Mifflin Company. All rights reserved.

Making a Will To make a will you will need to gather the following information: Names and addresses of family members Social security information A listing of assets and their value A listing of debts Information on insurance and job benefits Once you have gathered all of this information, you need to consult with your attorney to draw up your will. Copyright © Houghton Mifflin Company. All rights reserved.

Making a Will (continued) Other issues to consider in making up a will: Who will be the executor or executrix? Usually, this should be a close relative or friend. Do you have children? What do you want to give them and when? Are there charities or schools to which you would like donate? These are all questions you must consider to make up your will. You should give them all careful thought and also make sure you consult your attorney. Copyright © Houghton Mifflin Company. All rights reserved.

Changing a Will A will doesn’t become effective until the person making it dies. Thus, a will can be changed any time up to the death of the person making the will. A will can be changed: By destruction of the old will by the will maker By writing a new will (a new will revokes all previous wills) By amending a written will (the amendment is known as a codicil) Automatically by state law, to include children born after a will is written Copyright © Houghton Mifflin Company. All rights reserved.

Changing a Will (continued) A will may automatically change due to circumstances. If a piece of property is designated to be left to a particular person, and That piece of property is destroyed or disposed of before the maker’s death, That particular will provision will become ineffective. Copyright © Houghton Mifflin Company. All rights reserved.

Probating a Will Probate is the process of the court determining the validity of the will. The executor or executrix, with the help of the attorney, will file a petition to have the court declare the will valid and operative. The court where the will is filed is usually called Probate Court, Surrogate’s Court, or Orphan’s Court. The procedure followed after probating the will varies from state to state. Copyright © Houghton Mifflin Company. All rights reserved.

Administering the Estate After probate, the estate will have to take the steps to comply with the will’s direction. Assets are located, identified, and valued. Insurance companies and Social Security are notified to allow for determination of benefits. Debts are determined and paid. Tax returns for the estate are prepared and filed. Distribution of the estate assets is carried out. If there are insufficient funds to pay all bequests, then all bequests are decreased according to a formula. Copyright © Houghton Mifflin Company. All rights reserved.

Intestacy If a person dies without a will: The court will appoint an administrator or administratrix to administer the estate. Property, after payment of debts, taxes, and expenses, is distributed to heirs in accordance with state rules. Heirs are persons related by blood or marriage to the deceased. Copyright © Houghton Mifflin Company. All rights reserved.

Living Wills and Health Care Proxies Living will: a document that expresses a person’s preferences regarding health care decisions. A living will comes into play if the person is unable to make such decisions for themselves. Health care proxy: an agent is allowed (in some states) to make health care decisions when the person who appointed the agent is unable to do so. Copyright © Houghton Mifflin Company. All rights reserved.

The Need for Estate Planning Estate planning is a program designed to minimize estate taxes while distributing your assets in accordance with your goals. Distribution of assets can take place during the life or after the death of the person. Estate planning also includes ensuring that you have enough assets to finance retirement. Copyright © Houghton Mifflin Company. All rights reserved.

Taxes and Estate Planning Depending on the size of the estate, taxes may consume a large portion of the estate’s value. Estate planning takes into account your goals for distributing your assets while making the effort to minimize taxes. Estate tax: tax on the value of a person’s assets at death Estates are taxed by the federal government. Some states also have a state- level estate tax. Copyright © Houghton Mifflin Company. All rights reserved.

Taxes and Estate Planning (continued) Estate tax is on the net estate. The net estate is computed by taking the value of the estate’s assets and subtracting from it the following: Funeral and administrative expenses Debts of the deceased Gifts to charitable and educational institutions. Distributions to a spouse are not subject to the estate tax. Copyright © Houghton Mifflin Company. All rights reserved.

Gifts The estate tax and gift tax are designed to work together. People can avoid some estate taxes by giving away assets prior to death. Gifts are subject to tax at the same rates as the estate tax. There are exceptions provided in the law: A person may give a gift of up to $11,000 in cash or property per year, per gift recipient. A married couple can give $22,000 per year. Copyright © Houghton Mifflin Company. All rights reserved.

Gifts (continued) A gift is made by: Delivery of the gift to the recipient Opening a bank account for the person receiving the gift For the gift to be valid there must be: An intention to make a gift Delivery of the gift Acceptance and control of the gift by the recipient It is always best to document a gift in writing, giving: The date of the gift, and A description of the property given as a gift. Copyright © Houghton Mifflin Company. All rights reserved.

Marital Deduction The marital deduction allows all transfers between a husband and wife to pass tax- free. The marital deduction effectively postpones payment of estate tax until the death of the spouse who received property. Estate taxes will be paid when the surviving spouse dies. Copyright © Houghton Mifflin Company. All rights reserved.

Trusts Trust: a plan where a person (the trustee) is given assets to hold for the beneficiary of the trust. The beneficiary is the person who will receive the benefit of the trust assets and income. Copyright © Houghton Mifflin Company. All rights reserved.

Trusts (continued) Trusts can be created during the life of the person creating the trust (the trustor) or through a provision in a will. A trust created during the life of the trustor is known as an inter vivos trust (“between the living”) or living trusts In a revocable living trust, the trustor may change or revoke the trust at any time. In an irrevocable living trust, the trustor cannot change its terms or revoke the trust once it has been established. Copyright © Houghton Mifflin Company. All rights reserved.

Trusts (continued) A trust created through a will is known as a testamentary trust. A testamentary trust is established during the lifetime of the trustor, but the property is placed in the trust only at the trustor’s death. Copyright © Houghton Mifflin Company. All rights reserved.

Trusts (continued) Trusts Offer flexibility in providing income as needed Offer privacy: a trust never becomes public knowledge Allow the trustor to control who will get what assets and when they will get them Trusts can offer considerable income and estate tax advantages. Copyright © Houghton Mifflin Company. All rights reserved.

Developing an Estate Plan Developing estate plans requires the help of a lawyer and/or accountant. The lawyer or accountant will: Advise you of what information is required to create a trust Help you decide what your goals are and how to achieve them within your situation Copyright © Houghton Mifflin Company. All rights reserved.