Finance 553 Estate Documents

Estate Documents Estate Documents Three Minimum Documents for All Clients Will (Last Will and Testament) Handles Distribution of Assets at Death Power Of Attorney Handles Financial Issues Prior to Death Health Directives Handles Health Wishes when Incapacitated

Estate Documents Learning Objectives -- Wills Describe a Will and its essential parts Define: testate and intestate Explain advantages and disadvantages of a will Identify the three types of wills Distinguish between per capita and per stirpes Explain side letters and their uses Identify issues affecting wills Why is a Will considered a basic (essential) document for estate planning?

Estate Documents Definition of Will and Essential Parts A will gives the testator (originator of the will) the legal means to control the distribution of his or her assets after death To Die with a valid Will is to die “testate” To Die without a valid Will is to die “intestate” The laws of the state are used to distribute the assets of the deceased The laws are different in different states The laws may distribute the assets in a way that is contrary to the wishes of the deceased To Die with a valid Will that does not cover all the assets of the deceased is to die in “partial intestate” Named assets are distributed according to the Will Unnamed assets are distributed according to the laws of the state

Estate Documents Definition of Will and Essential Parts Introductory Clause Identifies the testator and state of domicile Identifies the next of kin Example of opening statement “I, Thomas Parry Monroe, living at 1010 South Union Street, Houston, Texas 77040 do hereby declare this my last will and testament.“ Will also typically include Revocation of all previous wills Name of spouse (current) Name of children from marriage May include previous marriages, adopted children, etc.

Estate Documents Definition of Will and Essential Parts Example Bequest Clause Identifies specific assets and or amounts to be distributed to a specific individual Example “ I leave my 1972 Datsun 240 to my oldest son Patrick.” Residual Clause Transfers unnamed assets to specific individuals Failure to have a residual clause may leave the deceased in “partial intestate” on the unnamed assets. “I leave all remaining property owned by me and not previously mentioned in this will to my residuary estate. I leave my residuary state in the following manner, 50% to my wife and 25% each to my two children.”

Estate Documents Definition of Will and Essential Parts Appointment of Executor (Executrix) Clause Names executor and succession of executors if first named executor refuses or is incapable of performing duties of the executor States the powers granted to the executor in fulfilling the instructions of the will May wave the surety bond for the executor May provide specific compensation for the executor (executor may elect to forego compensation that is a taxable distribution to the executor) Guardianship Clause Identifies individual(s) to raise minor children (and typically will have provisions for the cost of raising the minors) Can also name successor for guardianship if original refuses or is not capable of fulfilling the duties of the guardian Absent this clause, the court will appoint the guardian for surviving minors

Estate Documents Definition of Will and Essential Parts Tax Appointment Clause If specific assets are to be used for paying estate and gift taxes Can reduce the overall taxes against the estate and increase total distribution of assets to heirs, legatees, and devisees Attestation Clause Statement at the end of the will attesting to the document as the will of the testator Usually signed by two or three qualified witnesses Can be notarized Legatees typically should not be witnesses as it may jeopardize the validity of the will Example “On this day of January 7, 2016, the testator declares this as his last will and testament and signed in our joint presence and by us in his presence.”

Estate Documents Definition of Will and Essential Parts Self Proving Clause If notarized, the statement of the notary Example “In witness whereof, I have hereto subscribed my name and affixed my seal on this 7th day of January 2016 in the presence of the subscribing witnesses.” Other Clauses Simultaneous Death Clause Survivorship Clause Disclaimer Clause Contingent Legatee Clause No Contest Clause

Estate Documents The Contingent Legatee Clause When a non blood line recipient of the will precedes the testator in death and the will has not been revised this clause provides a process for the disposal of the property originally assigned to the legatee Typically the clause lets the heirs of the legatee receive the assets By per capita means all receive an equal amount and impacts the amount to a surviving legatee By per stirpes means the asset is divided by the original legatee(s) and heirs of the non surviving legatee get only that portion originally to that legatee SEE FIGURES ON PAGES 34 and 35 May stipulate living heirs of legatee or other distribution when legatee precedes testator in death

Estate Documents Legal Capacity to Execute a Will Sound Mind Test Age Requirement: Testator has reached age of majority in domiciled state or is an emancipated minor Mental Capacity: Has understanding concerning The consequences of the Will The nature and extent of the property being disposed of in the Will The natural objections of individuals that would seem to have a claim to the property of the testator Sound Mind Test Standard that the testator meets the above mental capacity requirement Not as strict as contract requirements Recipients of Property fall into three classes Heir (blood line) – Relative that receives property under a will Legatee – One who receives property under a will Devisee – One who receives real property under a will

Estate Documents Types of Wills Statutory Holographic Wills Drafted by an attorney Complies with the statutory laws of the state of domicile Generally must be witnessed Filed as a public document with the county clerk Holographic Wills Handwritten by testator (or agent of testator) Must be signed by testator but not always required to be witnessed Noncupative Verbal Will – Oral dying declaration Must be made in front of witnesses that must sign affidavits Usually limited in types of property and not always valid in all states

Estate Documents Revoking or Changing Will To Revoke a Will the testator can Destroy the Will (difficult if filed with county clerk) Create a new Will with a clause revoking all previous wills Changing Will – Events after initial draft of Will may change the desires of the testator Life events – Births, Death, Marriages, Divorce Material change in Assets and Property – acquire or dispose of assets Codicil – Legal Document that changes provisions of a Will Amendment or Supplement to the Will Must meet standards for creating a will (statutory or holographic) Is attached to the Will and becomes part of the Will Can add, delete, or alter the heirs, legatees or devisees of the will

Estate Documents Side Instruction Letter(s) of a Will Provides additional information or instructions of the deceased for Burial Rights and Funeral – Burial must be completed before probate so this provides instructions outside the Will so burial can take place prior to probate and the authentication of the Will Decease’s wishes on distribution of specific household goods – generally avoids cluttering of the will and is instructions to executor for completing the distribution of household goods Can provide information to the executor – information on safe deposit boxes, location of other important papers or assets, account numbers for assets, outstanding debt contracts, insurance contracts, or other items that will help executor complete the probate process The letter has no legal standing – but is an aide to executor

Estate Documents Statues Affecting Wills Forced Heirship – States can mandate that children are entitled to a minimum of assets for their Well Being Health and Safety Avoids children becoming wards of the state when the testator has sufficient assets to care for children Marital Share – Like forced heirship for spouse Felonious Homicide Statues Heirs, legatees, or devisees that have been convicted of killing the deceased cannot inherit through the will of the deceased Divorcee Statues – removed from will unless specifically named Anti-Lapse Statues – Children of deceased heir receive assets

Estate Documents Avoiding Will Contests Even though a Will meets all the requirements to be a Valid Will individuals may contest the will Heirs that are not named in Will can make claims against the estate Substantial fortunes left to nontraditional individuals or groups Caregivers – Undue Influence on the testator in state of weakness Churches – Undue influence on the testator in state of weakness Pets – Unreasonable amounts for surviving pets Court must “entertain” what appears to be legitimate claims Testator can name potential heirs in will and Provide a specific amount if and only if they do not contest will Provide specific disclaimer of an heir Pre-validate will prior to death

Estate Documents So, What are the benefits and limitations of a Will Wishes of Deceased can be carried out Can appoint desired Executor Can designate choice for Guardianship of minor children Can disinherit specific heirs Can provide provisions that minimize estate and gift taxes Can designate specific charities and assets (to minimize taxes) Other issues of importance can be annotated LIMITS Assets that pass outside of probate cannot be changed (insurance, retirement accounts, etc.) Could cause delay in probate if poorly written, contested, etc.

Estate Documents Learning Objectives of Powers of Attorney and Powers of Appointment Distinguish the difference between a Power of Attorney and Power of Appointment Describe the basic intent of a Power of Attorney Describe the basic intent of a Power of Appointment Distinguish between durable powers and springing powers Power of Attorney The ability of an individual to select an agent to act in the interest of the principal Typically a trusted individual is granted the power to make decisions that the principal would chose to make on his own Power ends at the death of the principal

Estate Documents What Does the Agent in a Power of Attorney Do? In general it allows the agent to maintain the estate of the principal Pay bills of the principal Maintain property of the principal A General Power of Attorney gives wide discretion over all decisions that the principal would normally make for himself or herself Some states limit the Power of Attorney such that the Agent Cannot make gifts for the principal Cannot self-deal, that is use the assets of the principal for his or her personal gain Pay agent’s debts Transfer assets to agent’s estate Transfer assets to agent’s creditors

Estate Documents What Does an Agent in a Power of Appointment Do? In general the agent has the power to direct assets of the principal Transfer assets to self Transfer assets to others May extend past death of principal General versus Limited Both Power of Attorney and Power of Appointment may be general or limited Limited means that the scope of decision making or time frame may be specifically stated and the power expires outside of the time frame Durable versus Springing Durable Powers of Attorney stay in effect even if principal becomes incapacitated Springing only begins once a specific named event happens

Estate Documents Advantages and Disadvantages of a Power of Attorney Enables trusted individual to maintain the estate of a principal in absence Enables trusted individual to maintain the estate of a principal who has become incapacitated Disadvantages If agent acts in own self interest the estate of the principal may be diminished If agent is also holding a Power of Appointment over the assets of the principal and the agent precedes the principal in death The assets of the principal are included in the estate of the agent This may cause gifting issues and taxes

Estate Documents Health Care Directives Three basic types of Health Care Directives Durable Power of Attorney for Health Care Living Wills and Advanced Medical Directives Do Not Resuscitate Orders Typically a Springing Power of Attorney – Event is incapacitation of principal Allows third party to make decisions on health care for principal Disclosure of medical records Blood transfusions Resuscitation (Cardiac) Organ transplants But not generally to removing life sustaining support - separate

Estate Documents Living Wills and Advanced Medical Directives Advanced directive on life-sustaining measures allowed by principal Resuscitation of heart Assisted breathing (ventilation via mechanical means) Feeding tubes Kidney Dialysis Can specify circumstances when these wishes are applied Can specify individual to make these decisions when principal is incapacitated States suspend these directives if principal is pregnant Avoids court appointments or lawsuits (Terry Shiavo Case – 2005) Do Not Resuscitate Orders Typically prepared when an individual is near death Only apply to CPR and not other medical issues

Estate Documents Other Estate Documents Documents for owned businesses LLC – Limited Liability Corporations and the passing of ownership Proprietorships – passing of ownership Documents for Insurance Property Insurance contracts Life Insurance contracts Documents for Pensions Company pensions IRAs Etc.

Estate Documents What are the implications for Financial Planning? Estate Planning is an essential part of the financial plan and poor estate documents can hurt clients Clients need to have thorough evaluation of estate documents and see that it matches their wishes Legal documents provide insurance against decisions that are in conflict with desires of client Legal documents can prevent a extended probate process that delays the distribution of assets to heirs Legal documents can appoint the appropriate individuals to serve as agents, executors, guardians, and health care directors Other issues?