CE 102-104 - Wills, Trusts, and Probate Administration I, II, and III (Textbook)



CE 102 Wills, Trusts, and Probate Administration I & CE 103 Wills, Trusts, and Probate Administration II & CE 104 Wills, Trusts, and Probate Administration III

Wills

Your will is an essential part of your estate plan. No matter what else you do to plan your estate, your will serves purposes that no other estate planning document can fill. Through your will, you can

• Designate who will care for your minor children and their money
• Detail your preferences for your funeral and the disposition of your body
• Plan how your estate will pay your bills
• Provide a backup plan in case something is accidentally left out of your estate plan or a bequest fails

Most people can compose a simple will, which is all some people need. This chapter outlines what goes into a will, and how to properly execute your will.

More complex estate plans utilize both a will and trust. If your estate is large, you need to engage in tax planning, or you want to do things that may be legally tricky (such as disinheriting an heir), you’ll probably benefit from having a lawyer draft your will.

Deciding Whether a Will Serves Your Needs

In one sense, asking yourself whether a will serves your needs is an easy question. Everybody has needs that can be served by a will, so everybody should have a will.

But what I’m asking is whether your estate plan can be managed with just a will. If you don’t have estate tax concerns, aren’t concerned about probate or having your will made part of a public court record, and simply want your estate to be distributed to your heirs when you die, a simple will may be all you need.

Until you’re near retirement age, a living trust probably won’t help you, but it will cost you time and money to create and update, and it will be more cumbersome for you to work with assets that you transfer into the trust. Sure, even younger people can suffer a sudden illness or die unexpectedly, but if you’re in pretty good health, you can cover your bases pretty well with a will, durable power of attorney, and healthcare proxy.

Trusts are most useful in your estate plan when

• Your estate may be subject to estate taxes. Presently your estate must be worth $2 million or more to pay federal estate taxes.
• You want to avoid probate court.

Most states have significantly improved the probate process, and smaller estates often qualify for simplified probate. It may be cheaper to probate your estate instead of creating and funding a trust.

Assets not covered by a will

As you review your assets, consider whether they’re jointly owned or already have a designated beneficiary. If you’re married, many of your assets are probably jointly owned with your spouse. Your insurance policies and retirement accounts name a beneficiary.

When joint ownership or a beneficiary designation defines who will receive property upon your death, it doesn’t matter what you put in your will. whatever your will says, the assets pass according to the title or beneficiary designation and never become part of your probate estate. These transfers are thus said to occur outside of probate.

The following sections address the different types of assets not covered by a will.

Insurance, annuities, and retirement accounts with designated beneficiaries

When you designate a beneficiary for an insurance policy, annuity, or retirement account, the asset is transferred to your beneficiary upon proof of your death. These assets are generally still included in your estate for the calculation of estate tax, but the probate court isn’t involved in the transfer of the asset to your beneficiary.

Your heir may receive significant benefits from receiving a retirement account outside of probate.

Insurance can be a very important part of your estate plan, and it may be possible for you to keep insurance proceeds out of your taxable estate. If the insurance payout will cause your estate to become taxable.

Property with a right of survivorship

If you’re married, you and your spouse probably jointly own your home. If your deed says that ownership is by the entireties or refers to a right of survivorship, your co-owners should receive your interest in the property without going through probate.

The various ways that property may be titled, and how that affects the transfer or inheritance of property.

Joint bank accounts

The money in your joint bank accounts is available for either account holder to withdraw, at any time. Unless you set up the account to require the consent of all account holders, your joint account holder doesn’t need your permission to withdraw funds. When you die, your interest in the account passes to your joint account holders.

You need to be careful with joint bank accounts for several reasons:

• The IRS will try to count the entire balance of your joint account in your taxable estate and will require the joint account holders to prove that they contributed money to the account balance.
• Your joint account holder can empty your account. There are many sad stories where can elderly person added a younger sibling or child to the account to “help” pay their bills and manage their assets, only to have the “helper” pocket the money.

If you intend to maintain total control over the account until your death, you may be better served by adding a transfer-on-death provision to your account rather than joint ownership.

Transfer-on-death accounts and titles

As an alternative to joint ownership, you can give somebody interest in a property or financial accounts that don’t take effect until you die. Although the asset is included in your estate for gift tax purposes, the transfer-on-death provision transfers ownership to your beneficiary upon your death without the necessity of probate. You keep total ownership and control of the asset during your lifetime.

You need to be careful using this technique. If your family circumstances change, your transfer-on-death provision may become outdated, as in the following cases:

• If you set up a deed to transfer ownership to your three children upon your death and a child dies before you, the property will go to your surviving children unless you included your grandchildren as contingent beneficiaries.
• If you later have or adopt another child, unless you update the provision, that child won’t inherit.
• If you set up an asset to transfer on death to your spouse, you must remember to update that provision after divorce, or your ex-spouse will receive the asset.

Exploring the Types of Wills

Wills come in many different types. For the most part, the difference is one of complexity. The basic elements of a simple will are also present in a highly complex will, but additional provisions have been added.

The statutory will

Most states offer a statutory will, a very simple will that, if properly executed, will be accepted by a probate court. Statutory wills are often made available as fill-in-the-blanks forms, so they’re pretty easy to complete. You may be able to get a form by asking your state representative’s office to provide one, and in many states, they’re available for download from the state legislature or state courts Web sites.

At the same time, statutory wills are very simple. They can help you implement a basic estate plan, but aren’t meant to help with tax planning or more complicated estates. While unquestionably “better than nothing,” a statutory will is most useful if you have a very small estate and desire a very simple estate plan.

The handwritten (holographic) will

A holographic will is written entirely in your handwriting and is signed by you, but isn’t witnessed. Most states disfavor holographic wills and recognize them only under narrow circumstances, such as when they’re prepared by a soldier who is engaged in combat.

A cousin of the holographic will is the oral will, sometimes called a nuncupative will, where there is no written document at all. A court will entertain an oral will in a few circumstances – typically only where the person making the will faces imminent death, where disinterested witnesses produce a written record of the will shortly after the person’s death, and where only small amounts of money are involved.

Sometimes you can go through the trouble of writing or articulating a will, but you can’t produce a written will that is properly witnessed. Make sure that your wishes will be respected by following your state’s formalities for the execution of your will.

A will of your own

Your will is more powerful than you may realize. In addition to parceling out your estate to your heirs, you can create and fund trusts, implement parts of your estate tax avoidance strategy, designate caregivers for your minor children, and outline your preferences for your funeral and memorial service.

As a general rule, when you create a will, it’s sensible to

• Follow state law formalities for the execution of your will. Otherwise, your will may be rejected by a probate court.
• Whenever possible, keep your estate plan simple. Don’t complicate your will unless you’re truly convinced that the added complexity is necessary to your estate plan.

Other wills

When I discuss a simple will, I’m usually talking about a will that appoints an administrator, perhaps designates people to care for your minor children, and allocates your estate between your heirs. But you can do a lot more with your will.

• Testamentary and pour-over wills: You can create a trust with your will or direct your estate to put assets into a trust.
• Joint wills: You can create a joint estate plan with your spouse and may also be able to make your joint estate plan legally binding even after your death.
• Self-proving wills: You can add an affidavit to your will to simplify the process of submitting it to probate.

Elements of a Will

To be effective, your will must describe who you are, what assets you have, who you want to receive your assets, and how your assets are to be divided. Beyond the basic elements, your will appoints a personal representative to administer your estate and can also appoint caregivers for your minor children. It can create or fund trusts to hold and manage your assets after your death. Your will can also describe your funeral and burial preferences.

Who you are

The popular conception is that a will commences with the declaration, “I, John Smith, being of sound mind and body …” However, it’s not necessary to describe your health. And if you’re not mentally competent, it doesn’t make any difference to say you are.

All you need to do is identify yourself sufficiently so that people will know that it’s your will.

What are your assets

Part of the estate planning process is figuring out what you own. Your possessions will typically include

• Personal assets:
  • Cash, savings, and checking accounts
  • Investments
  • Home furnishings
  • Jewelry
  • Art and antiques
  • Collectibles
  • Your wardrobe
• Real Estate, including your primary residence and any vacation property
• Insurance policies and annuities
• Retirement plans

If you’re a business owner or are a partner in a small business, your estate also includes your interest in the business.

Not all your assets will go through probate. Insurance policies and retirement plans probably have a designated beneficiary. Your home may automatically go to your spouse as the joint titleholder. But you should still consider those assets when planning your estate, as they can affect how you distribute your other assets. For example, if one of your children is the beneficiary of a life insurance policy, you can leave a larger bequest to your other child to balance out the inheritances.

You should also take inventory of your debts, including mortgages and bank loans, credit cards, and car loans.

Your estate will pay off your debts before your heirs receive their inheritances. If some of your property has to be sold to pay your debts, a specific bequest of that property will fail, or your estate may not have enough money left over to fill all your bequests.

Who are your beneficiaries

After you know what you own, you need to figure out who you want to give it to. Put together a list of your possible heirs. Be overinclusive. You don’t have to leave something for every person on your list.

Here are a few ideas to get you started:

• Your family, including
  • Your spouse
  • Your children and stepchildren
  • Your grandchildren and great-grandchildren
  • Your parents
  • Your sisters and brothers
  • Aunts, uncles, and cousins
  • Nieces and nephews
• Your friends
• Educational institutions
• Charities

You need to also consider the circumstances of your heirs. Young children may benefit from having their inheritances left to them in a trust, providing for their support and payment of educational expenses over the years. An heir who doesn’t manage money well may benefit from a spendthrift trust. An heir who receives public assistance due to a disability may benefit from a special needs trust.

What are your bequests

You know what you own. You know who your heirs are. You now need to figure out who gets what (and who gets left out).

The law limits your ability to disinherit your spouse and sometimes your minor children.

Avoid failed bequests

Your bequests may fail in one of two ways:

• Your heir may die before you or may decline an inheritance.
• You may leave a bequest of property that is no longer part of your estate when you die.

The first problem is pretty easy to address. If you have a specific item of property that you want to remain in the family, designate an alternate beneficiary. For example, if you leave your grandmother’s engagement ring to your eldest daughter, name her younger sister as the alternate beneficiary.

Naming an alternate beneficiary is also important as your bequest to an heir who dies before you may pass to that heir’s descendants, rather than staying in your estate. If you don’t designate an alternate beneficiary for Grandma’s engagement ring, it may end up going to your son-in-law.

If you leave a bequest of a specific asset that is no longer in the estate, your bequest failed. This problem can arise with anything that is sold, lost, spent, or destroyed, including cars, collections, investments, and cash. For example:

• Your will bequeaths “My house at 1212 Cherry Tree Lane” to your son. You subsequently sell the house, move, and don’t update your will to leave your new home to your son. His gift fails. Your first house is no longer in your estate, and your new home doesn’t automatically get substituted for the old. Although a more generic description, such as simply saying “my home.” may prevent the failure of your bequest if you own a different home at the time of your death, it won’t help if you no longer own a home.
• You have an investment account worth $500,000. You leave $100,000 to your brother, with the balance to be split between your children. Before you die, you suffer an illness that runs up large medical bills. After your medical bills and the other debts of your estate are paid, only $80,000 remains in the account. Part of your brother’s gift fails, as he receives only $80,000 of the $100,000 you intended him to receive. But although you intended them to each inherits $200,000, your children receive nothing from the account.

Sometimes a gift will fail by accident or oversight. Say that you have two children, Jack and Peter. Your will leaves bequests to “My children, Jack and Peter.” You later have a third child, Sue, but forgot to update your will. Even though she’s one of your children, you’ve excluded her from that bequest. Note that this omission may not leave her empty-handed and may cause her to inherit more than her siblings.

With a bit of extra thought, you can help make sure that your bequests succeed.

• You can use generic descriptions, such as “my personal residence” or “my car” so that changes in your assets are less likely to cause a gift to fail.
• You can gift in percentages (“20 percent of my stock account to my brother and the rest divided equally among my children”) rather than in specific dollar figures.
• You can give class gifts, “to my children” or “to my grandchildren,” rather than naming specific individuals.

Creating a moral obligation or a binding inheritance

Sometimes you have reasons why you don’t want to leave property directly to the intended recipient. Here’s a common example: Perhaps you have a child who is disabled and receives public assistance. Rather than creating a special needs trust, you may choose to leave that child’s share of your estate to another sibling, trusting that your children will take care of each other.

Most of the time, things work out the way you want. Probably 95 percent of the time, the heir who holds an inheritance for the benefit of somebody else will do exactly what you wanted. The rest of the time, perhaps out of personal financial hardship or perhaps out of greed, the person holding the money will spend it, and the person they were supposed to look after has no legal remedy.

Even when things work out, this arrangement can burden a family relationship. The child trusted with the money may come under constant demands for more money, perhaps amounts over what you left, from their sibling.

If you want to create a moral obligation on your heirs, you can take some comfort in the odds. But be sure that you also consider the burdens and risks you may create.

Reference to a tangible personal property memorandum

Some states allow you to refer your will to an external document that lists items of personal property and who inherits them. This memorandum allows you to leave your household furnishings and personal possessions to specific people, change the list to add new items, remove things you no longer possess or change who gets what, without changing your will.

The formal requirements for the memorandum can be very different, depending upon the laws of your state. Some states are content with a list you sign and date, while others require formal witnessing and execution. Not all states permit this type of memorandum.

If your state permits and you create a memorandum, make sure that you keep it in a secure place known to your representative. If it gets lost or misplaced, it can’t be followed.

What happens with the residue (if any) of the estate

After all your bequests are made, odds are that something will be leftover. Items of personal property that weren’t specifically described in your will, some of the money that was set aside to pay the expenses of your estate – your clothes, a bequest that failed whatever it is, the leftover items are the residue of your estate.

A residuary clause describes how those leftovers are to be distributed to your heirs. For example, “The residue of my estate is to be divided equally between my children.”

If you don’t include a residuary clause, anything left in your estate will be distributed according to your state’s laws of intestate succession. Truly, including a residuary clause is so easy that you have no excuse not to have one.

Payment of debts by the estate

Your estate is obligated by law to pay your debts. Your representative provides notice to your creditors, consistent with the laws of your estate, those creditors submit claims for payment, and your estate pays those debts found to be valid.

Help your representative by leaving, along with your will, a list of your debts. That list will make notifying your creditors of your death and their obligation to submit claims to your estate so much easier for your representative.

Most wills include a clause directing your representative to pay your bills. Some are more demanding, suggesting that your representative should affirmatively seek out and pay your creditors.

A clause relating to your debts can’t reduce your estate’s obligations to pay its debts under state law. It can only enlarge the responsibilities of your administrator. I thus consider this clause to be optional and in most cases suggest leaving it out of your will.

Describing your funeral and burial wishes

If you have specific wishes for your funeral and burial, you can describe them in your will. Topics you may want to address include

• Whether you want to be cremated or buried or have other wishes for the disposition of your body.
• Where you want to be buried
• What type of funeral and memorial service you desire and any specific people you want to have invited to your service
• Any poems, scripture, songs, quotations, or readings you’d like shared at your service

Your estate plan should anticipate the payment of funeral expenses. Funeral costs, along with your other bills, are paid before any distributions are made to your heirs.

Designating a personal representative

Your representative also called an executor manages your estate in the probate court. This role is important and sometimes difficult, so you need to choose somebody who has the necessary interest and qualifications to administer your estate. You want somebody mature, financially responsible, and trustworthy.

You can describe in your will how your representative is to be compensated. Unless your representative is your primary heir, I suggest providing for payment.

You should also designate an alternate personal representative, in case your first choice is unable or unwilling to serve. If you don’t choose a personal representative or don’t have an available alternate when your first choice is unavailable, the probate court will appoint somebody to administer your estate.

Designating a guardian for any minor children

If you’re providing for your minor children, you should designate a person you want to care for your children if you die. You can separate physical care from finances, designating one person to take physical care of your children and another person to handle their money.

You’ll also want to designate successor caregivers, just in case your first choice is unable to fulfill their duties.

Your signature

After you finish drafting your will, you must sign and date it. Some states require that you sign your will in front of your witness. Others allow you to sign it at an earlier time, as long as you inform your witnesses that it’s your signature and acknowledge that the document is your last will.

Executing a Valid Will

Every state requires your will to be witnessed by two legally competent individuals. Many states limit the inheritance of what may be received by a witness to your will, so use witnesses who aren’t also your heirs.

Choose the right witnesses

If someone challenges your will, your witnesses may be crucial to establishing the authenticity of your will and signature. What does that mean? It means that you want your witnesses to be

• Credible
• Available
• Disinterested

Disinterested doesn’t mean uninterested. It means that they don’t stand to profit from their actions. If one of your heirs contests your will and it was witnessed by another heir, a court may be skeptical of your witness’s testimony. Also, as a check on self-interested testimony, most states limit the amount you can leave to an heir who serves as a witness. In short, pick witnesses who are not heirs.

You may also want to pick witnesses who are younger than you are, and who have relatively stable addresses. Although some states allow you to use minors as witnesses as long as they’re competent to testify in court, most states don’t. You’re best served by choosing witnesses who are legal adults.

Signing and executing your will

Although the specific requirements for execution are different from state to state, I suggest taking a conservative approach to executing your will. If you want to go a bit overboard:

• Consider using three witnesses instead of two and make sure that they’re all legal adults.
• Don’t use your heirs as witnesses.
• Have a signing ceremony where all your witnesses see you sign your will and sign on as witnesses in front of you and each other and your notary.
• At your signing ceremony, complete a self-proving affidavit before a notary.

If you go the extra mile, even if you significantly exceed what your state demands of you, you reduce the chances that a challenge will be made to the validity of your will.

Trusts

Beyond the living trust, you can choose from many other types of trusts as you plan your estate. This chapter outlines the reasons why you may want to use a trust and describes the parts of a trust, including who created it, why it was created, where the trust’s assets are, who the trust is created for, who’s in charge of it, and when it ends.

What’s a Trust and Why You Need One

Like a will, a trust is a tool used in estate planning. Your trust is a legal entity you create to hold assets that, once transferred into the trust, are managed in accord with its written terms. Those terms of your trust describe how you want the trust’s assets to be managed and distributed. You choose a person to manage the assets of your trust, the trustee, who agrees to accept that responsibility and to abide by the terms of your trust. You also choose the beneficiaries of your trust, and when they receive trust income or distribution of the trust’s assets.

Any person who creates a trust is called the grantor. The grantor may also be referenced as the settlor or donor of the trust. For example, when you create a revocable living trust, you are the grantor. You then transfer assets into the trust, which is managed by the trustee for the benefit of your beneficiaries.

Some trusts are revocable, meaning that you can change your mind and take your assets out of the trust at any time you choose. Other trusts are irrevocable – once you create them and transfer assets in, you can’t take those assets back out except as described in the trust document.

Some trusts are extremely complicated to create and fund and should be drafted by an estate planning professional.

Benefitting from Trusts

Planning your estate with trusts provides a variety of advantages over-reliance upon a will alone. Your will remains an essential part of your estate plan, but you gain enormous flexibility by adding a trust to the mix. Trusts can help you provide for your spouse or child over an extended time, help provide supplemental income to people with disabilities, help protect people who aren’t good at handling money, and help you avoid probate.

Not everybody needs a trust. Probate is often quite simple for smaller estates, and privacy concerns are often overblown. If you can achieve your estate planning goals with a simple will, you may want to stop there. As you review your estate plan, if your circumstances change, you’re free to create and execute a trust.

They’re flexible

Trusts offer you enormous flexibility to decide how your assets will be managed. You can place assets in trust during your lifetime, reserving control over them but providing for your trustee to take over if you become incapacitated.

You can create and fund your trust while you’re still alive; while you’re still alive and use your will to fund your trust (a pour-over trust); or with your will (a testamentary trust).

If your trust is revocable, you can revoke your trust and transfer its assets back to yourself at any time.

You can provide for your incapacity

Your trustee’s powers to manage trust assets are immediate. You can make those powers contingent upon a future event, such as your incapacity. But once you become incapacitated by whatever definition you choose to provide in your trust, your trustee can immediately take control of trust assets and start managing those assets for your benefit.

Having your trustee take over management of your estate is a lot easier than forcing your heirs to go to court to ask a judge to appoint a conservator to manage your estate. With the trust’s assets, banks and financial institutions are much more likely to defer to the instructions of a trustee, while they may be cautious about accepting the validity of a power of attorney before honoring the instructions of your attorney-in-fact, the same concerns aren’t present with a trustee because the trust is the owner of its assets.

If your business assets are held in trust, your trustee can immediately step in to protest your business interests while your business succession plan is implemented.

Although a trust can provide significant benefit in the event of capacity, your trustee can manage only the trust’s assets. The trustee has no authority over assets not owned by your trust. You should still execute a durable power of attorney and healthcare proxy.

You can avoid taxes

Trusts can be a powerful tool to avoid estate taxes. Common trusts include

• The marital deduction trust (A/B trust): This trust takes your marital exemption out of your spouse’s taxable estate, while at the same time allowing your spouse to enjoy the income produced by the trust and, for purposes such as medical care or support, even access the trust’s assets.
• The Crummey trust: This trust allows you to make tax-exempt gifts during your lifetime. These gifts accumulate in a trust to be distributed to your beneficiary at a later time.
• Irrevocable life insurance trusts (ILITs): An ILIT owns a life insurance policy in your name and is the beneficiary of the policy. When properly executed and funded at least three years before your death, the insurance proceeds aren’t included in your estate.

A revocable living trust, of itself, doesn’t help you avoid estate taxes. The primary benefit of a revocable living trust is probate avoidance. You can include provisions in your revocable living trust that can help reduce estate taxes, but they’re not inherent to that type of trust.

If you make mistakes with a trust designed to help you avoid estate taxes, the IRS may disregard the trust and treat its assets as part of your taxable estate. What sort of restrictions might you encounter?

• With some trusts used for estate tax planning, you may not serve as trustee, and you may not retain control over the trust’s assets once the trust is created.
• With other trusts, the trust must be in effect for a minimum number of years before you die, or the assets are included in your estate.
• With still others, trust assets must vest with the beneficiaries within a specified timeframe.

If your estate is large enough to pay estate taxes, you should get professional assistance in drafting and funding your tax avoidance trusts. At present, the federal estate tax exemption is $2 million, meaning that estates valued below that amount aren’t subject to federal estate taxes.

You can avoid probate

When you leave your estate to your heirs with a will or don’t create an estate plan at all, a probate court distributes your estate. Using a trust provides some significant advantages:

• When you leave assets by will, your heirs have to wait months for the probate process to finish before your bequests are distributed to them. With a trust, your heirs may receive their bequests immediately.
• If you operate a business, your trust can become effective during your incapacity or immediately upon your death, and your trustee can be authorized to immediately start managing your business affairs. With probate, your business may languish for weeks or months while your heirs petition the court to appoint somebody to manage your interests.
• If you’re in an estate where your representative and the attorney for the estate are paid a percentage of the value of your estate, having major assets held by your living trust may significantly reduce the cost of probate.
• You can usually avoid having a public probate record of assets that you distribute by trust.

Although in this chapter I discuss some steps you can take to help ensure that your trust is upheld, trusts are very difficult to challenge in probate court. The more likely source of probate litigation is the alleged misuse of trust assets by your trustee, something you can minimize with a careful choice of trustee, careful definition of the trustee’s powers, and a requirement that the trustee periodically provides an accounting of the trust’s assets to your beneficiaries.

Your estate will have assets that go through probate. If you have a small estate, you may not need to avoid probate, and a living trust may be an unnecessary complication and expense in your estate administration. Also, if you don’t have a trustworthy trustee, the judicial oversight from the probate process may better ensure that your bequests reach your intended heirs.

Probate avoidance may be a benefit of your estate plan, but your focus should be on creating the estate plan you want.

A trust can help protect your privacy

If you leave your estate to your heirs with a will or choose not to plan your estate at all, your estate will have to be probated. The records of a probate court are public, meaning that anybody can go to the courthouse to seek your will, look at the inventory of your estate’s assets, or find out who your heirs are and how much money they received.

A trust doesn’t need to go through probate. Thus, in most cases, the terms of the trust are never made part of a public record. The size of your estate, the identity of your heirs, and the amount you leave to each remain private.

Selecting a Trustee

Depending upon the trust, the trustee may be you, a trusted friend or family member; a professional, such as a lawyer or accountant; or an institution, such as a bank.

You may also designate co-trustees so that more than one person manages your trust. If you do choose cotrustees, you should also describe the powers they each may exercise individually and those that must be exercised jointly. For example, you might permit either trustee to pay your medical bills, but require both trustees to agree to the sale of a trust asset, such as real estate.

If you choose cotrustees, you should provide a mechanism for dispute resolution, be it a coin toss, drawing the high card from a deck of cards, or formal mediation or arbitration.

Questions to consider when selecting a trustee include

• Is the person responsible with money and capable of managing money and other assets?
• Is the person willing and able to carry out the terms of your trust?
• If the person trustworthy and fully prepared to manage the assets of the trust solely for the benefit of the beneficiaries?
• Does the person have time to manage your trust?
• Is the person willing and able to provide regular accountings to the beneficiaries, consistent with state law and the terms of the trust?

Serving as a trustee is a difficult work, and not everybody is prepared to accept the task or perform it indefinitely. Your trustee will also grow older and may become ill or unable to serve. It is important to designate at least one successor trustee.

Your trust will continue even if you don’t designate a successor. If your trustee dies or becomes unwilling to serve and you haven’t designated a successor, your heirs will have to go to court to have a judge appoint a trustee. Expect that any person a court appoints will charge fees to the trust and that those fees will not be limited by the terms of your trust.

Choosing Your Beneficiaries

Every trust must have at least one beneficiary. Common beneficiaries include your spouse and children; your friends; charities; and educational organizations.

You can designate individuals (“my daughter, Sarah”) or classes (“My grandchildren”) as beneficiaries of your trust. Just make sure that your descriptions are sufficiently clear that your beneficiaries can be identified.

Transferring Assets into Your Trust

For your trust to be effective, you must transfer ownership of property into the trust. Although I prefer the term assets, you may sometimes hear the property held by a trust identified as the res or corpus of the trust.

A trust may be created to hold a specific asset, such as a house or life insurance policy. If maybe more general, created to hold whatever assets you transfer over to the trust. But whatever the design and purpose of your trust, for any assets you intend to include in the trust, you should define the powers of the trustee and how you ultimately want those assets to be distributed to your beneficiaries.

When you create your trust, you can and should put the cart before the horse. Even though the trust won’t become effective with a particular asset until it’s transferred into the trust, your trust should reflect your wishes and intentions.

Say, for example, that you own a primary home and a vacation home. You can describe in your revocable living trust how you want those properties used, managed, and maintained after your death. Then, after the trust is executed, you can deed the properties over to the trust. The same is true for investment accounts or other assets you intend to place in your trust.

Your trustee must know the location of your trusts to manage them. Make sure that your trust describes its assets clearly so that the trustee knows what and where they are.

Staying in control

With many trusts, you may retain significant control over trust assets even after they’'re transferred into your trust. If your trust is revocable, one obvious power you retain is the right to revoke the trust.

With a revocable living trust, you typically name yourself as the initial trustee and maintain full control of your assets. Even if your trustee takes control of your trust upon your incapacity, you can require your trustee to continue to defer to your wishes, to the extent that you remain able to make and communicate informed choices.

Other types of trusts, particularly those used for estate tax avoidance, require that you surrender most of all of your control of the asset to an independent trustee. Even then, you may be able to provide for your use and enjoyment of trust assets as long as the trust continues.

Giving (or limiting) your trustee powers

When you draft your trust, you may give the trustee very broad powers over the trust’s assets, or you may grant narrow powers. Powers commonly granted within a revocable living trust include

• The power to manage and sell property, including real estate
• The power to rent or lease real property
• The power to borrow money for the benefit of the trust
• The power to invest the assets of the trust
• The power to litigate claims on behalf of the trust
• The power to compensate professional, such as lawyers, accountants, and property managers who provide services to the trust
• The power to make special distributions of the trust’s assets for the benefit of the beneficiaries (for example, to help with a medical emergency).
• The power to make certain gifts

You can permit the significant restriction of the trustee’s powers. You won’t be surprised that you’re most likely to be limited in your ability to restrict the trustee’s powers with trusts created for estate tax avoidance.

Cancelling the trust

When you create a trust, you will create it either as a revocable trust or as an irrevocable trust. As you’ve already figured out, you can revoke a revocable trust at any time you choose. You cannot revoke an irrevocable trust, and once you transfer assets into the trust you cannot get them back out.

The trust you are most likely to use in your estate plan is the revocable living trust. You are most likely to use irrevocable trusts if you have a large estate, and you wish to avoid estate taxes.

Distributing trust assets

As with your will, when you draft your trust, you get to pick where your money goes. You may also impose limits on gifts, such as when trust income or assets will be distributed to your beneficiaries. For example:

• You can provide that your children will receive one-quarter of their inheritance at the age of 18, one-quarter of their inheritance upon graduation from college, and the balance upon reaching the age of 30.
• You can provide for your trust to pay for your grandchildren’s educational expenses until they graduate from college and then provide for a lump sum payment of the balance.
• You can provide that your children will receive their inheritance upon marriage.

You can also create asset protection or spendthrift trust to help protect your child’s inheritance from being lost to creditors, divorce, or poor money management.

Be aware as you add contingencies that you may prevent your gift from ever reaching your beneficiary. If you want to be sure that your beneficiary will receive a gift even if the condition isn’t met, make sure that you spell out that wish.

For example, if you want to encourage your son to go to college but recognize that he may never attend or may drop out, you can provide, “To my son, Ben, I give $100,000.00 to be distributed to him upon his graduation from college, or when he reaches the age of 35.”

The process of adding conditions to a gift made through your trust is very similar to imposing restrictions on a bequest made through a will.

You can easily get carried away with contingencies, placing restrictions on when, how, or why distribution is to be made. I suggest keeping your trust simple.

Be aware that some states will set aside your living trust, in whole or in part, to provide for your spouse’s elective share. The elective share is the amount of your estate that your spouse is entitled to choose to receive under state law if you leave a smaller bequest in your will.

Putting Your Trust into Effect

Once you have drafted your trust, you must execute it. That is to say, you need to sign and date it in front of witnesses to make it legal and effective. I suggest having a signing ceremony where the following people are present:

• You
• Your chosen trustee
• Three witnesses (in most states, two will suffice, but having an extra witness never hurts)
• A notary public

Most states require your trust to have at least two witness signatures. I suggest using three witnesses. Not only will that meet the requirements of all states, but you also have an extra witness available if somebody tries to invalidate your trust.

Here’s the basic process:

1. When everybody is present and has established their identities to the satisfaction of the notary, the notary "swears everyone in, as if you all were going to testify in court.
2. In the presence of your witnesses and the notary, you will place your initials on every page of the trust and then sign your trust. (If you’re also serving as trustee, you will sign both as a grantor and then again as trustee in Step 3.)
3. Your trustee then signs to accept the terms and conditions of the trust and to formally accept the duties of a trustee. (His signature helps ensure that your trustee will serve and is okay with the amount of compensation you have authorized under the trust. This signature, as you would expect, is made in front of your witnesses and notary.)
4. Next, your witnesses initial every page of your trust and sign your trust, affirming that they saw you voluntarily sign your trust.
5. Finally, your notary will notarize the trust. (Although in most cases notarization is not required, it can help ensure that your trust is upheld in the event of a challenge.)

Now your trust is signed and sealed, but you’re not done yet. You must transfer assets into your trust.

When the Trust Ends

You define in your trust when the trust will end. That may be a relatively short period, for example, if your trust simply distributes your assets upon your death. But if you want to delay your gifts or make gifts in installments over years, your trust may continue for a considerable amount of time.

You should provide for how the trustee will distribute any remaining assets of your trust after distributing all specific gifts. Even if you don’t think your trust will have any remaining assets, the unexpected can happen. For example, a beneficiary may die or decline a gift, the trust may receive income from a source that you didn’t anticipate, or you may forget to address an asset when you make your specific gifts.

Probate Administration

Your estate is the total amount of property you own at the time of your death. Probate is the process through which a court confirms the validity of your will and supervises the settlement of your estate.

This chapter describes what happens when a will is submitted to a probate court, how the probate process works, and what happens if somebody contests your will.

Navigating Probate Court

Once a person dies, the estate is submitted to the probate court and the process of confirming the validity of your will begins. A probate court is a court authorized to oversee the administration of your will and the settlement of your estate. If you have a will, the probate court determines whether the will is valid and then oversees the administration of the estate by the executor (the person appointed in the will by the decedent to oversee the estate). If you don’t have a will or the will is determined to be invalid, the probate court appoints an administrator, and your property is distributed according to the state’s laws of inheritance.

Probate proceedings begin when your representative or the custodian of your will files your will with the probate court, or when some other person files a petition seeking to administer your estate. The person who submitted the petition to the court is known as the petitioner.

The probate court’s actions include

• Receiving your will and entertaining any challenges to its validity
• Appointing a personal representative (also known as an executor) for your estate
• Supervising the actions of your representative
• Requiring that legally interested parties (your legal heirs) are notified of the proceeding
• Settling disputes between people who claim to be entitled to your assets
• Overseeing the payment of debts owed by your estate
• Approving the distribution of your estate’s assets to your heirs

The probate court also oversees the final tax returns filed by your estate and the payment of any estate taxes.

Probate court proceedings are open to the public, and members of the public can examine the probate court file for your estate, which includes your will and bequests. Although some people are troubled by their estate being a matter of public record, except in cases involving celebrities, it’s unusual for any aspect of an estate to be publicized.

Discovering How Estate Size Affects Probate Procedures

Probate has a reputation for being slow and costly, and that reputation isn’t entirely undeserved. Fortunately, state legislatures have recognized that the type of probate procedures necessary to safeguard the assets of large estates are often unnecessary for smaller estates, and many smaller estates are resolved through a faster, less costly process.

For probate court, the size of your estate relates only to the assets that pass through the probate process. If you’ve used estate planning tools, such as a living trust to pass your assets to your heirs outside of probate, you can leave a substantial asset to your heirs while still taking advantage of simplified probate procedures.

Probate for small estates

Although probate laws are different in each state, most states offer two levels of simplified probate for a small estate.

Some estates have very limited assets, perhaps just a few thousand dollars, so it may be possible to seek disposition of personal property without administration by a probate court. The person who pays the final expenses of the estate, such as medical bills or funeral costs, submits a simple petition to the court requesting reimbursement, along with

• The decedent’s death certificate
• Paid bills claimed for reimbursement
• Documentation describing the asset to be released
• A copy of the decedent’s will (if one exists)

If the court accepts that the petitioner is entitled to the decedent’s assets, the court issues an authorization for the transfer or release of those assets to the petitioner.

For more substantial estates that don’t exceed a certain limit (usually between $70,000 and $100,000) and where the estate’s creditors are known, the estate will likely qualify for summary administration. Summary administration is a streamlined probate process that’s designed to be faster and less expensive than the full probate process. This process has significantly less court oversight than with full probate proceedings.

In most states, absent any unexpected complications, simplified probate proceedings take two to four months. Being in probate for several months doesn’t mean that your estate will be tied up in court proceedings throughout that time. Your administrator and the lawyer for your estate perform most of the work in probating your estate outside of court. If everything goes smoothly, the court hearing to settle your estate may take as little as an hour.

Probate for larger estates

Large estates continue to require formal administration, in which a personal representative is appointed to act on behalf of your estate. This process typically takes between six months and two years, depending upon the size and complexity of your estate.

Understanding the Role of the Personal Representative

The personal representative is typically required to be a legal resident of the state where your estate is probated or to be a close relative. The personal representative is often referred to as the executor or executrix of your estate. Your representative is required to act in the best interest of your estate and can be held financially responsible for mismanaging the assets of your estate.

Upon your death, the personal representative you named in your will must decide whether or not to accept that role. If you discussed your estate plan with your representative and he agreed to serve, he’ll likely accept the appointment. Upon your death, your representative should promptly locate and read your will.

Your representative arranges for your funeral and usually follows any funeral instructions you leave. If you don’t leave instructions, your representative chooses how to conduct your funeral and burial.

Your representative also takes control of your property and financial accounts, obtains appraisals of your assets to determine their market value, and creates an inventory of your estate. Your representative also opens a checking account for your estate. All estate income is deposited into the account, and the estate’s debts are paid from the account.

If necessary, your representative will start probate proceedings for your will. Your representative pays the debts of your estate, files all required tax returns, and distributes remaining assets to your heirs. Your personal representative’s duties continue until all these tasks have been performed and the estate is completely settled.

Your representative has the right to be paid for his services. You can provide for compensation in your will, as agreed with your representative. If you don’t provide for compensation or don’t have a will, your representative may request compensation from the court. Depending upon the laws of your state, the compensation granted by a court will be an hourly fee or a percentage of the value of your estate. A member of your family often agrees to serve as your representative without charging a fee. Managing an estate is a difficult job, and compensating your representative for his time and effort is perfectly appropriate.

The following sections describe some of the representative’s responsibilities in more detail.

Giving notice to legal heirs

In most states, your legal heirs (the people who inherit from your estate under state law if you don’t have a will) are entitled to formal notice of probate proceedings. The purpose of the notice is to allow your heirs to object to the validity of your will or to challenge the proposed distribution of your assets before inheritances are distributed from your estate.

Some state permits probate without notice to your heirs, but the distribution of your estate may be left open to legal challenges for years. With formal notice, the opportunity to challenge the will or object to the distribution of assets normally ends when the estate is closed. For more information about how your will may be challenged, see the upcoming discussion on “Avoiding Will Contests.”

Collecting property for distribution

Your representative must secure your personal property and real estate and take appropriate measures to safeguard your property. He needs to take control of

• You home and its furnishings
• Other real estate holdings
• Your car and its keys
• Your safe deposit box and its contents
• Your savings and retirement accounts and any checkbooks
• Your interest in a business you own, or your share of a closely held business

Your representative must make sure that utility bills are paid for your real estate, and that your property is secured and properly maintained. Valuable should be protected from theft or loss. Although your existing insurance coverage may be adequate, your representative should contact your insurance companies to inform them of your death and to continue that coverage. Your representative may need to obtain additional insurance to fully protect your assets during the settlement of your estate.

If your estate doesn’t have sufficient funds available to pay its debts, your representative may seek permission from the court to sell assets to pay those expenses.

Notifying and paying creditors

Your representative should cancel your credit cards and close any lines of credit.

As part of the probate process, your creditors can make claims against your estate for any money you owe at the time of your death. Which creditors are notified of the probate proceedings and how they present their claims to the probate court or your representative vary from state to state. Creditors have a limited amount of time to submit their claims for payment, usually between three and six months from the date notice is given. In states where notice to creditors isn’t required or is optional and isn’t given, that period can be as long as 24 months.

If your estate doesn’t have sufficient assets to pay all your bills, state law determines how creditors are paid, and the extent to which certain creditors go unpaid. Your heirs will not inherit your debts.

Your representative will pay all valid claims made by your creditor out of the assets of your estate. If your representative determines that a claim isn’t valid, your creditor must file a motion with the probate court to obtain payment.

Distributing bequests

After any deadline for the submission of claims against your estate has expired and taxes are paid, your representative may submit to the probate court a proposed final distribution of your estate. In a typical estate, most creditors are paid out of the final distribution.

The final distribution describes the inheritances your heirs will receive from your estate. After the probate court approves the distribution, debts are paid, and inheritances distributed, your representative may seek an Order of Discharge from the probate court. That order ends the personal representative’s duties to your estate.

Hiring a Lawyer

The personal representative of your estate isn’t required to hire a lawyer. Your estate is less likely to need legal services if your representative is your sole heir, and no one is disputing your will or the distribution of your assets. However, you should anticipate that your representative will need to hire a lawyer to perform services for your estate, and your estate will pay the legal fees.

You can designate an attorney for your estate within your will. In many cases, the lawyer who drafted the will is designated as the attorney for the estate.

In many probate cases, the lawyer’s role is largely advisory. In more complicated cases, the lawyer may have to help with court proceedings or defend against a will contest. Services the lawyer typically provides include

• Helping your representative understand her duties
• Helping your representative understand and interpret the provisions of your will
• Drafting deeds and conveyances required by the state

The personal administrator can have the lawyer handle most of the probate responsibilities, but this approach can be expensive for your estate.

Most lawyers charge the estate an hourly fee for the services they perform. The lawyer may also agree to perform a specific set of services, or even all services required by your estate, for a fixed fee. In a minority of states, the lawyer can charge a percentage of the value of your estate as his fee.

Overseeing Probate: The Judge

The probate court judge appoints your representative, oversees the probate proceedings, and approves the distribution of assets from your estate. If any motions are brought before the court, such as a request for an interpretation of the language of your will, or if a will contest occurs, the probate court judge presides over the litigation. Will contests are discussed in the next section of this chapter, “Avoiding Will Contests.”

Most of the time, the provisions of your will are easily understood. Yet sometimes a will includes an ambiguous or unclear provision. If the administrator or an interested party to your estate is uncertain what a provision means, he can ask the judge to review the language and issue a ruling as to its meaning.

The probate judge also supervises the actions of the personal representative. The judge may require the personal representative to post a bond to protect the estate’s assets in the event of mismanagement or misconduct. The judge reviews inventories and accountings submitted by the personal administrator and approves the final distribution of your estate’s assets.

If the judge believes that your representative is incapable of performing required tasks or is concerned that your representative has mismanaged the assets of your estate, the judge may dismiss your representative and appoint a successor.

The proposed final distribution of the estate must be submitted to the judge for approval. The judge listens to any objections to the final distribution and, depending upon evidence submitted, approves or rejects it.

If the proposed final distribution is approved, the debts of the estate are paid, and inheritances are distributed in accord with its provisions. If the proposed final distribution is rejected, the personal representative must prepare a new proposed final distribution, taking into consideration the reasons for the judge’s ruling.

If somebody contests your will, the probate judge conducts a trial to determine the validity of your will. In some states, either the person bringing the contest or the estate may request a jury trial.

Avoiding Will Contests

A will contest is a formal challenge to the validity of part or all of your will. If you’re worried about a will contest, relax. The vast majority of wills aren’t contested, and most will contests are unsuccessful. Still, to make sure that yours is not the exception, you need to be aware of how and why will contests occur.

The person who contests a will must be interested in your estate. As a general rule, he is either named as the beneficiary in a prior will or entitled to a share of your estate under the laws of intestate succession (laws that identify heirs and distribute the assets of people who die without valid wills).

Claiming that inheritance is unfair won’t support a will contest. The contest must be premised upon a valid legal ground concerning the validity of the will, your capacity to make a will, or undue influence (somebody coerces you into making bequests against your better judgment), fraud against you, or mistake.

When a will contest succeeds, the most common outcomes are for the court to

• Disallow part of your will, but leave the remaining provisions in effect
• Disallow your will in favor of a prior will
• Disallow your will and treat you as having died intestate (with no will)

Some law firms specialize in will contests, typically charging the client a percentage of the money obtained from your estate. Your estate has to hire a lawyer to defend it against the challenge, and the distribution of your estate may be held up during months or even years of litigation. The cost of challenging your will can be free to the person making the challenge and potentially very costly to your estate and your intended heirs.

Although you can include a no-contest provision in your will, which disinherits anyone who contests your will, the provision may have limited effect. A no-contest provision prevents inheritance only if the heir bringing the challenge to your will is unsuccessful and doesn’t save your estate the cost of defending against the challenge. Your no-contest provision must include a gift over provision, which describes how the forfeited share is to be distributed in the event of a will contest.

Even when a will contest is unsuccessful, some states won’t apply no-contest clauses if your heir is found to have had good cause (see the next section) to contest your will. If the challenge is settled, as often occurs, the clause will not affect. Further, if you disinherit an heir, that heir has nothing to lose in bringing a challenge.

You can minimize the chances of a challenge to your will based on fraud or undue influence by documenting your reasons for making bequests that may seem surprising or unfair. You can discuss your reasoning with your heirs so that they understand your intentions and won’t be shocked when they see your will.

Validity

The first class of challenge to a will claims that your will isn’t valid. The most common claims relate to the execution of the will:

• You did not sign the will.
• The will was improperly witnessed.
• The will was not properly notarized.

When you prepare your will with the help of a lawyer, it’s unlikely that its execution will be successfully challenged. When you prepare your own will, you must take care to follow the instructions for the proper execution of your will, as even a small mistake can result in its being declared invalid.

Another set of claims relate to the validity or authenticity of the will itself:

• The will is a forgery.
• The will submitted to the court isn’t your most recent will. If proved valid, the newer will replaces the older will.

In may also be alleged that the will was procured by fraud against you. Even though you were of sound mind and executed a will consistent with your testamentary goals, it’s alleged that somebody intentionally deceived you into changing your bequests. For example, somebody may trick you into believing that she’s a long-lost relative in order to be added to your will. Your child may try to get you to disinherit your new spouse by convincing you that your spouse is unfaithful. The facts rarely exist to support this type of fraud claim, but if it’s proved that you relied upon fraudulent misrepresentations when making your will and that the person making the misrepresentations intended to influence your will, the court may set aside part or all of the will.

In another form of fraud, somebody who is helping to prepare your will may misrepresent the content of the document in order to trick you into signing it. If it’s proved that you did not know the content of the will you signed, the will isn’t valid.

You can help ensure that your most recent will is submitted to the probate court by making sure that you void or destroy prior wills and keep your current will in a safe, secure place.

Mental incapacity

When you execute your will, you must have testamentary capacity, meaning that you must be “of sound mind.” In other words, you have the mental capacity to understand your assets, your relationship to your intended beneficiaries, and the effect of your will. If somebody challenging your will proves to a probate court that you lacked testamentary capacity, the probate court will declare your will to be invalid.

The most common allegations of incapacity are that

• You weren’t mentally competent when you signed your will. (This claim may be based upon advanced age or illness. Even where it’s not disputed that you were competent at a later date, somebody contesting your will can allege that you were temporarily incompetent at the time you signed you will.)
• You were under the influence of alcohol or drugs when you signed your will. (Someone can make this claim even if you only take prescription medications.)

The person making this challenge presents evidence to the court that you were of unsound mind when you created your will. Evidence may include medical records and testimony about unusual behaviors or irrational conduct around the time of the execution of your will.

The most common step taken by people who anticipate a challenge to their mental capacity is to have their doctors affirm that they were mentally competent when they executed their wills. For example, at the time you execute your will, you can visit your family doctor, describe that you’re making a will, and have the doctor record in your medical chart that you displayed full testamentary capacity at the time of your visit. You can have your doctor write a letter, or more formally an affidavit (a written statement made under oath), reciting that you’re mentally competent to execute a will and then keep that document with your will. You can do the same with an independent psychiatrist – somebody who has no treatment relationship with you and who performs an independent evaluation of your competence solely to your will.

If you’re very concerned about a will contest, you can also hire a professional legal videographer (a person experienced who make legally admissible video recordings) to record a signing ceremony, where you discuss your will and your wishes for your estate, explain your reasoning for your choices, and then execute your will in front of your witnesses and notary. This video is simply a supplement to the documentation you obtain from medical doctors.

The more documentation you create, the easier it will be for your estate to document your testamentary capacity. Statements from your doctors or a videotape demonstrating that you knew what you were doing can facilitate a quick resolution to a will contest premised upon your incompetence.

Undue influence

A claim of undue influence alleges that you weren’t acting of your own free will when you made your will. Although your testamentary capacity isn’t challenged, it’s alleged that somebody interfered with your independent judgment when you executed your will. an appearance of undue influence may arise if you create a new will shortly before your death.

When evaluating allegations of undue influence, a court’s considerations include

• Your relationship with the person alleged to have exerted undue influence
• What motive may have existed to apply undue influence
• What opportunity the person had to exert undue influence
• Your ability to resist the alleged influence
• Whether the provisions of your will are consistent with the claim of undue influence
• Any connection between the alleged undue influence and the terms of your will

Merely pressuring somebody to create a will is not undue influence. The issue is whether the influence caused you to distribute your assets differently than you otherwise would have done.

Claims of undue influence are often directed at caregivers – whether they’re family, friends, or hired help – who receive a larger share of your estate than your other heirs expect. Some caregivers do abuse their positions to try to get a larger inheritance, and this can happen even when family members provide your care. Even when it is your sincere wish to reward your caregiver, your other heirs may regard your bequest as unfair and may suspect undue influence. Similarly, your children of a prior marriage may accuse your new spouse of undue influence.

A claim of duress alleges that you executed your will in response to the threats made against you. For example, someone may allege that you were held against your will or threatened with violence if you didn’t sign a will.

If a court finds that you wouldn’t have executed the will if not for the improper influence or duress, the court will invalidate your will.