Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 What Is a Will? Legal document Provide for disposition of property Revocable during lifetime Applicable at death

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 When Should a Will Be Used? To avoid state laws of intestate succession To provide the testator with some control over distributions of his property –To leave property to non-relatives and charity To allow the testator to name the personal representative (executor) of their estate –Person or institution who carries out the directions in the will To set forth the terms of a testamentary trust and name a trustee to manage the assets To “pour over” assets into a trust at death

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 When Should a Will Be Used? To nominate a guardian of the person to care for a minor child To nominate a guardian of the estate to manage a minor child’s assets To set forth contingent beneficiaries –For example, if child predeceases parent, the child’s share can be directed to pass to the child’s issue or be divided among the child’s siblings (the testator’s other children) To name and disinherit certain persons and avoid triggering the pretermitted or omitted heir statute To minimize estate taxes (and who bears burden)

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 Will Requirements Minimum age requirement: 18 and over Testator needs to know the –Nature and extent of his property –Natural objects of his bounty Attested will –Must be in writing –Signed by testator –Two witnesses (most states) Other permissible will forms not recognized by all states: –Holographic will – entirely in testator’s handwriting –Nuncupative will – oral

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 Choosing the Terms of a Will Decision based on: –Needs of beneficiaries –Feelings testator has toward beneficiaries –What is important to the testator –Circumstances of the persons and organizations the testator wishes to benefit

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 Changing or Revoking a Will Codicil –Separate written document executed with same formalities as the will –Used to change a provision in an existing will New will specifically stating “revoking all prior wills” Burning, tearing, or writing “revoked” across an old will (but can be disputed) Some state statutes provide for revocation of a will upon marriage or divorce

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 Death Tax Implications of Wills Federal estate taxes are generally imposed on property that passes at death whether by intestacy, will, titling, or a contract with beneficiary designation Each U.S. resident has a unified credit that eliminates estate tax on the first $3.5 million in 2009 and $5 million in 2011 and 2012 (in 2010, executor may elect $5 million exemption or no estate tax, if the latter, estate subject to modified carryover basis rules)

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 Death Tax Implications of Wills States may impose a “credit estate tax” or impose their own state death tax –State death taxes may be owed even where there is no Federal estate tax due If decedent’s assets are valued in excess of the unified credit exemption equivalent amount, federal estate tax will be owed

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 Death Tax Implications of Wills Available deductions from the decedent’s gross estate include: –Marital deduction –Charitable deduction –Unpaid mortgages and debt on property includable in estate Unless value of property includable in estate is reduced by debt –Claims against estate –Theft and casualty losses –Funeral and administration expenses –State death taxes

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Income Tax Implications of Wills For income tax purposes a probate estate is a separate taxable entity The personal representative is responsible for filing a fiduciary federal income tax return (Form 1041) Filing of a state income tax return may also be required during the period of administration

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Income Tax Implications of Wills No income tax is recognized solely as the result of death Assets that have increased in value will generally receive a “step-up” in basis at death –In 2010, the step-up rule was modified, so that only assets up to a specified amount received a step-up –Note: Assets that are given away during life do not receive a step-up in basis, but retain the transferor’s basis

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 Income Tax Implications of Wills Beware of income in respect of a decedent (IRD) –These are assets that would have been taxed as income had the decedent lived long enough to receive it, including tax-deferred investments like: Retirement account distributions from IRAs, annuities, and qualified plans Stock options Ongoing payments received from an installment sale

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 When to Update a Will Significant change in value of property to be distributed Testator has moved to a different state Changes in family circumstances (births, deaths, marriages, divorces) Personal representative, trustee, or guardian can no longer serve as expected Federal or state laws change Changes in business ventures Disposition or other objectives change

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 Costs of Probate Cost of probate administration Cost of regular accountings to the court

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 Advantages of Probate Court supervision of management and disposition of assets Cut off period for creditor claims Cost of drafting intervivos trust and transferring title may be greater than cost of probate

Wills Chapter 8 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 Will Contests Causes: –Testator lacked sufficient mental capacity –Testator was unduly influenced at the time the will was drafted –The will was not executed according to the statutory formalities –Will offered for probate has been revoked –Will offered was a forgery