© Cavico & Mujtaba, 2008 Business Law for the Entrepreneur and Manager Frank Cavico and Bahaudin G. Mujtaba Chapter 15 – Wills and Trusts

© Cavico & Mujtaba, 2008 Business Law for the Entrepreneur and Manager (Frank Cavico & Bahaudin g. Mujtaba, 2008; ILEAD Academy, LLC) Table of Contents – Chapter Titles Chapter 1 – Introduction to Law and the Legal System Chapter 2 – Torts and Business Chapter 3 – Products Liability Chapter 4 – Contract Law Chapter 5 – Sales Law and the Uniform Commercial Code Chapter 6 – Agency and Employment Law Chapter 7 – Business Organizations Chapter 8 – Commercial Paper and Banking Transactions Chapter 9 – Creditors and debtors – Rights and Responsibilities Chapter 10 – Internet Law Chapter 11 – Intellectual Property Law Chapter 12 – Real Property Law Chapter 13 – International Business Law Chapter 14 – Liability of Accountants and Other Professionals Chapter 15 – Wills and Trusts Chapter 16 – Personal Property, Gifts, and Bailment Chapter 17 – Conclusion and Case Problems

© Cavico & Mujtaba, 2008 Chapter Topics Wills – Intestate Descent and Distribution –Execution of Wills –Revocation of Wills –Components of Wills –Will Substitutes Trusts –Express Private Trusts –The Creation of Private Express Trusts –Charitable and Honorary Trusts –Trust Administration –Beneficiaries’ Interests

© Cavico & Mujtaba, 2008 Introduction This chapter reviews two important areas of the law, wills and trusts, which are important subject matters not only for their business, estate planning, and tax and accounting applications, but also for their personal family ramifications. The two legal areas, wills and trusts, are treated separately for academic purposes in two distinct sections to the chapter, but in the “real-world” they are often interrelated, especially because, as will be seen, one very common way of creating a trust is by means of a will. It is also very important to point out that these two important areas of the law are governed in detail by state laws, which may differ.

© Cavico & Mujtaba, 2008 Intestate Descent and Distribution Before one can examine the legal concept of a will, traditionally called a Will and Testament, one must be cognizant of the laws of intestate descent and distribution, that is, the rules governing the disposition of property upon one’s death when one dies without having a will. Initially, it should be noted that most states make no distinction between real and personal property in descent and distribution; moreover, the terms “heirs” and “next of kin” are treated synonymously.

© Cavico & Mujtaba, 2008 Lineal and Collateral Heirs, Per Stirpes and Per Capita Lineal heirs are people who stem from one another in a line which includes the intestate decedent, for example, one’s mother and father, and grandmother and grandfather. Collateral heirs stem not from each other, but from a common ancestor, for example, one’s brother and sister or one’s cousins. Per capita distribution means that if the relationship among all members in a class of “takers” is the same, for example, all are children of the decedent, then they all take the same equal share. Per stirpes means that when a relationship between “takers” is unequal, then each person takes by representation, that is, a person takes his or her ancestor’s share.

© Cavico & Mujtaba, 2008 Execution of Wills A will or will and testament is a legal instrument disposing the property of one’s estate that only takes effect on the death of its maker; it “speaks at the time of death.” A testator is the person who executes a will. In order to be admitted to probate, a will must either dispose of property, appoint an executor (or in some states a personal representative), or revoke another instrument. Testamentary intent is a requirement for a valid will. Testamentary intent means that that the testator must have had the intention to make a particular instrument his or her will.

© Cavico & Mujtaba, 2008 Revocation of Wills As a general rule, a testator is entitled to revoke his or her will at any time prior to death. There are three principal revocation areas to examine: 1) revocation by written instrument, 2) revocation by physical act performed on the will, and 3) revocation by operation of the law. The first category is revocation by written instrument. An express revocation by a subsequent instrument is recognized by the law. The rule of law is that a will may be revoked in whole or in part by the express terms of a later written instrument.

© Cavico & Mujtaba, 2008 Components of a Will – Codicils and other Instruments and Documents The most important legal concept to examine in this section is the codicil to a will. A codicil is a testamentary instrument executed with the same formalities as a will, executed subsequent to the will, which typically modifies, alters, or expands the will. Initially, it must be noted that a codicil can “save” a will; that is, if the original will was not legally sufficient, but then the testator subsequently executes a codicil, the will and the codicil are read together and treated as a single testamentary instrument executed on the date of the codicil.

© Cavico & Mujtaba, 2008 Will Substitutes The three main substitutes to a will are the joint ownership of property, both real and personal, the use of deeds to transfer real property, and the device of a trust. The first two will substitutes were covered in the Real Property chapter to this book, and the important legal concept of a trust is covered in the next major part to this chapter.

© Cavico & Mujtaba, 2008 Express Private Trusts A trust is the transfer of legal title to property to another person, called the trustee, who is to manage the property for the benefit of the beneficiaries of trust. There are a variety of trusts that the law recognized. The first to be examined, and the most common one, is the express private trust. An express private trust is a fiduciary relationship regarding property, real or personal, wherein the trustee holds legal title to the trust property (called at times the trust principal or res), subject to enforceable equitable rights in the beneficiary or beneficiaries of the trust. The trustee possesses legal title; the beneficiary or beneficiaries hold equitable title. The person who creates the trust is called the settlor (or at times the grantor, but not “settler”).

© Cavico & Mujtaba, 2008 An Express Private Trust An express private trust must have five elements: 1) an intention on the part of the settlor to create the trust; 2) a trustee; 3) trust property or res; 4) a beneficiary or beneficiaries; and 5) a valid trust purpose. It is important initially to underscore that no consideration is required to create a trust; it can be created gratuitously. Note also that the temporary absence of one element does not necessarily destroy the trust or prevent the creation of the trust.

© Cavico & Mujtaba, 2008 The Creation of Private Express Trusts The first category of trusts to examine is the inter vivos trust, which is a trust created by a settlor when he or she is alive. An inter vivos trust can be created in two ways: –1) An inter vivos trust can be created by a present declaration of trust. A declaration of trust is a statement by the owner of the property that he or she holds the property as trustee in trust. This act creates an inter vivos trust with the settlor as trustee. –2) An inter vivos trust can be created by transfer of property by the settlor in his or her lifetime. A present transfer to the trustee is required; the trustee takes legal title upon the delivery of the deed to the trust property, document of title, or physical delivery of the property.

© Cavico & Mujtaba, 2008 Charitable Trusts A charitable trust is a trust for the benefit of society, the public, the community, or for some indefinite portion thereof. Such a trust must have a charitable purpose. It is critical to note that for such a trust the beneficiary or beneficiaries must be indefinite. The permissible recipients must be unnamed and a changing class, for example, the “needy,” and not particular individuals, even if very poor. The charitable purpose, moreover, can be expressed in very general terms, for example, a trust for “charitable” or “humanitarian” purposes.

© Cavico & Mujtaba, 2008 Trust Administration The initial important point to make regarding trust administration is to define the trustee. The trustee is the person named in the trust, who has legal title to trust assets, and is charged with the duty of effectively managing and administering the trust. The trustee has certain powers as well as duties in handling trust affairs. Most states have statutes that set forth the powers of the trustee; and these statutes typically hold that the trustee has virtually all powers regarding the trust property as a fee simple owner would have with respect to the property.

© Cavico & Mujtaba, 2008 Summary This chapter has examined two very important areas of the law, not only for business but also for the family and estate planning reasons. The wills part to the chapter discussed what a will is, how wills are created, and how they can be revoked and amended. The wills part also examined briefly the legal doctrines that impact a person’s ability to draft a will and for the will to transfer property. The administration, or probate, of wills was also briefly mentioned. The trusts part to this chapter examined the concept of a trust, discussed how trusts can be created, and defined and differentiated the variety of trusts the law recognizes.

© Cavico & Mujtaba, 2008 Reference 1.Cavico, F. & Mujtaba, B. G., (2008). Business Law for the Entrepreneur and Manager. ILEAD Academy Publications; Davie, Florida, USA. ISBN: Cavico, F. and Mujtaba, B. G. (2008). Legal Challenges for the Global Manager and Entrepreneur. Kendal Hunt Publishing; United States.