© 2007 ME™ (Your Money Education Resource™) Estate Planning for Financial Planners Chapter 2: Basic Estate Planning Documents

2 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Basic Documents in an Estate Plan  Wills  Side Letters of Instruction  Powers of Attorney for Property  Durable Powers of Attorney for Health Care  Living Wills or Advance Medical Directives  Do Not Resuscitate Orders (DNRs)

3 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Wills  Legal document providing the testator (will-maker) the opportunity to control distribution of his property at death; avoids state’s intestacy law distribution scheme.  May be revoked or amended by testator.  Effective only upon death of the testator.

4 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Intestacy  What is it? Dying without a valid will or Dying with a will that does not dispose of all probate property.  Majority of individuals die intestate  Intestacy laws are state driven Illinois  Spouse, no descendants: spouse 100%  Spouse, descendants: spouse 50%, descendants 50%  No spouse, all to descendants equally  No descendants, siblings  No siblings, parents  No parents, grandparents  All else fails, state of Illinois

5 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Risks in Intestacy  Children are usually treated equally, which may not be equitable.  Per capita All beneficiaries receive an equal amount  Fair????  Or adjust based on… One child much younger, hasn’t completed college Financial success of children Previous gifts  One to Princeton; one to EIU  If not per capita, discuss with children  Court-appointed administrator vs. executor. Surety bond

6 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Advantages of a Will (1 of 2)  Selection of executor/executrix as decedent’s personal representative to administer the estate.  Transfer of assets that are not automatically transferred at death.  Designation of guardian for minors and or dependents.  Transfer of assets to charity.  Utilization of marital deduction.  Disinheritance of unworthy heirs.  Minimization of estate tax burden.  Direct estate’s share of tax burden as well as source to pay such taxes.

7 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Limitations of Wills  Does not prevent disinherited parties from contesting will. 2010: Brett Carr challenges his mother’s (Gail Posner’s) will  She left $1 million to him; $3 million to her dog’s trust fund and $5 million to housekeeper to watch dog  Courts can invalidate certain restrictions or sections of a will (too many constraints on transfer of assets).  Will does not supercede automatic transfers upon testator’s death (i.e., contractual arrangements).  Poorly drafted will may become invalid or testator’s wishes may not be understood.

8 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Types of Wills (1 of 2)  Holographic Wills Written in testator’s handwriting. Must be signed and dated by testator.  Noncupative Wills Oral. Dying declarations made before sufficient witnesses. Not valid in all states.  Statutory Wills Generally drawn by an attorney, complying with the laws for wills of the domiciliary state.

9 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Types of Wills (2 of 2)  Mutual or Reciprocal Wills Two identical wills leaving all assets to the other. Sweetheart wills. Not binding on the other party until death and can be changed. What happens when second spouse dies?  Joint Will One will for two people. At the death of the first person, the other is contractually bound by the will.

10 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Legal Capacity to Execute a Will  Mental Capacity Understand what is being done by writing of will. Recognize and recollect the property being disposed by the will. Recognize the relationships of those friends and relatives who have any claim to testator’s assets.  “Sound Mind” Rules Not as rigorous as capacity rules required to form legal contracts.

11 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Common Clauses in Wills (1 of 3)  Introductory clause Identifies testator, testator’s residence, state of domicile, and next of kin.  Declaration Clause Identifies document as last will and testament of testator. Revokes all previous wills and codicils of testator.  Bequests Clause Directs specific property to be passed to others.  Residuary Clause Distributes the residue of the estate.

12 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Common Clauses in Wills (2 of 3)  Clause for identification and selection of executor/executrix (and successors).  Guardianship Clause Names guardian for minors or other legal dependents.  Grandma vs. Aunts  Appointments and Powers Clause  Clause directing payment of debts and taxes (includes sources from which to pay them).  Attestation Clause Provision at end of document signed by the witnesses as authentication of testator’s will.

13 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Common Clauses in Wills (3 of 3)  Self-Proving Clause Declaration signed by the notary stating that he witnessed the testator and the witnesses sign the will.  Simultaneous Death Clause  Survivorship Clause Can’t exceed 6 months or won’t qualify for marital deduction  Disclaimer Clause Disclaiming party cannot have benefited. Must be made in writing within (9) months. Person disclaiming can’t direct disposition of property.

14 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Revoking a Will/Codicils  To revoke the testator can: Destroy the old will by shredding or burning it. Create a new will specifically revoking the old one.  Codicils Supplement to a will. Separate document that must meet all the legal requirements of a will.  Modifies, explains, or amends will. Testator must be competent each time a codicil is written.

15 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Side Instruction Letter  Generally details the testator’s wishes regarding the disposition of specific tangible possessions as well as the funeral and burial wishes of the decedent. Who gets Grandpa’s rocking chair?  While letter has no legal standing, the executor will generally carry out the wishes of the decedent.

16 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Statutes Affecting Wills (1 of 2)  Forced Heirship Requires a certain portion of the estate to transfer to the decedent’s children.  In general, if child born after will executed gets intestate share  Intentionally omitted, generally get nothing  Generally name heirs as surviving children instead of naming specific kids Unless not sure who your kids are

17 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Statutes Affecting Wills (1 of 2)  Marital Portion Requires a certain portion of the estate to transfer to the decedent’s surviving spouse.  Can generally take against will and get intestate share  In Illinois, spouse gets one-half if no kids and one- third if you have kids  Felonious Homicide Statutes Prevents legatees and heirs who have been convicted of intentionally killing the decedent from inheriting under the decedent’s will or through intestacy.

18 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Statutes Affecting Wills (2 of 2)  Divorce Statutes Invalidate a provision in a will that leaves assets to a former spouse.  Still get life insurance, retirement plans  Anti-Lapse Statutes Presumption that a if a close relative such as a child or sibling is not alive then the testator would have wanted the assets to flow to their heirs.

19 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Provision in wills  No contest clause Limit or eliminate share received by beneficiary if contest amount received under will  Less than 3% of wills contested 2/3 of challenges unsuccessful More contests in future  Divorce  Longer live expectancies

20 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Avoiding Will Contests  Will contests often occur in nontraditional relationships.  Being open with heirs before death may alleviate some of the conflict.  Well-drafted wills can often discourage will contests.  Alternative options may be appropriate (lifetime gifts, trusts, property titling).  Validation of the will by the courts before the testator’s death may be an option if the state allows.

21 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Avoiding Hijacking of Assets  Hijacking: assets don’t get from decedent to intended beneficiaries Discuss your estate plans with your intended beneficiaries  If they don’t know they will receive inheritance, they will not know their inheritance was hijacked Use professional trustees  Little supervision of successor trustees of living trusts Don’t accidentally get married  Can challenge large inheritance by grandpa’s 22 year-old girlfriend, not his 22 year-old wife Discuss how caretakers will be compensated  Family members: larger percent of estate?  Nonfamily members: grandpa falls in love

22 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Power of Attorney (1 of 3)  Legal document authorizing a trusted person to act on one’s behalf. General Power of Attorney (broad) Causes inclusion in gross estate Limited Power of Attorney (specific)  Does not survive death of principal.  Power of appointment Power to transfer property

23 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Power of Attorney (3 of 3)  Durability Feature Power remains in effect even if the principal becomes incapacitated.  Springing Power available Agent’s power “springs” into existence upon some defined event or determination.

24 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Advantages/Disadvantages of Power of Attorneys  Advantages Eliminates need to go to court to appoint a guardian of the estate. Allows agent to sell property if needed.  Disadvantages Agent may abuse the power. If agent holds a general power of appointment, then the assets will be included in the agent’s gross estate if he predeceases the principal.

25 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Durable Power of Attorney for Health Care  Appoints agent to make health care decisions in case of maker’s incapacity.  Power of agent does not expire with person’s incapacity or disability; only at death.  Usually uses springing power.  Power always revocable by principal.  Example of Power of Attorney for Health Care.

26 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Living Wills/Advance Medical Directives  Legal document expressing an individual’s last wishes regarding sustainment of life under specific circumstances. Exception for pregnant patient.  Some states have a registry so it can be filed.

27 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Do Not Resuscitate Order  Declares the principal’s wish to avoid having CPR performed in the event the heart stops beating.  Filed with medical records and a state registry, if available.