“The road of the truth - teller
has always been rocky”
There are several ways property owned by the decedent can be transferred at death; by contract designation, by Will, by law or by allowing state law to dictate how the estate will be distributed.
The objective of this text is to explain the methods of all four and also to describe the duties and responsibilities of an Executor, Administrator or personal Administrator when administering an estate. All three positions require the assembling and management of property and the paying of estate debts and taxes. Also the proper distribution of estate assets crucial while administering an estate will be discussed.
When an individual dies there are three ways property may pass:
1. Contract designation.
2. By law.
3. By Will.
Probably the best examples of property passing by contract are life insurance, annuity contracts and trust agreements. The benefits of owning a life insurance policy are numerous but for estate planning purposes the critical benefit is the right the individual has in naming his/her own beneficiary. By naming a beneficiary the owner obligates the insurance company to pay the proceeds to the designated beneficiary. If the policy owner named a beneficiary for the policy in his/her Will, this would have no effect if the beneficiary designation in the policy was different. One consideration that is usually not conducive to proper estate planning is to name the estate of the insured as the beneficiary as the proceeds will now be tied up in the probating of the estate and thus subject to possible long delays.
Trust agreements are another example of transfer by contract. (These vehicles have become so popular we have devoted an entire chapter to them.) Basically the trust agreement is a contract between the “grantor” and the “trustee.” The beneficiary is not a party to the agreement but does have an equitable interest in the trust property.
The trustee will hold the actual legal title to property in the Trust until it is distributed. When the grantor dies, property rights of the beneficiaries in the trust take place. Depending on the trust agreement many different situations may be played out. For example, certain beneficiaries may become entitled to trust income while others only receive a certain percentage of trust assets per year. The trust agreement will define such responsibilities of the trustee. Another example would be a qualified retirement plan that provides a death benefit. The death benefit would be-in-accordance with the plans terms and the participants election. Another example would be property that is owned jointly with rights of survivorship. A final example would be the use of prenuptial or antenuptial agreements.
These agreements tend to limit the transfer of property between spouses in line with marital rights. The reason why prenuptial is popular is because it is used by persons who wish to marry but who also wish to establish their right to leave their property to their loved ones prior to taking their marriage vows. These pre-marriage contracts make it possible for the spouses to protect the inheritance rights of their respective children by prior marriages, and, as a result, prevent strife over the disposition of their estates. The laws of all states favor these contracts if they are properly prepared.
After marriage contracts can also be used to set forth the spouse's inheritance wishes. Be careful when dealing with these types of contracts as they are looked upon with suspicion by courts and, as a result, must be entered into very carefully. The requirements of an after marriage contract, where permitted, are much more complicated and rigorous.
There are six transfers dictated by law:
1. Joint tenants with right of survivorship refers to property that is jointly held and would automatically pass to the surviving joint tenant. We see this occurring in the case of tenancies by the entirety and joint tenancies with rights of survivorship.
2. Family allowances occurs when money is "given to a decedent's family to provide for a family's support until the estate is settled”.
3. Homestead allowance makes a certain amount of decedent's property inaccessible to creditors.
4. Dower provision is seen in common law states. These are provisions made for a wife from her husband's property.
5. Courtesy provision is also seen in common law states. This is a provision made for a husband from a wife's property. Both of these provisions deprive a spouse of the right to "disinherit" the other spouse. Many times, the surviving spouse is entitled by law to no less than one-third the Probate assets of the deceased spouse.
6. Intestate succession is another way that property may pass by law. When an individual fails to prepare a Will and dies intestate, state law prescribes by statute how the decedent's property will be distributed.
In reality those closest to the decedent will usually secure many assets of the estate. The problem with the state deciding is that often times estate property may be divided and given to very young children when the decedent would have preferred that all property go to the surviving spouse. Many people believe that the state will ultimately end up with the assets if no Will has been drawn up. This would happen only if there are no blood relatives alive to receive it. When this occurs the property passes (escheats) to the state.
CONSUMER APPLICATION
Robert lives in a Community Property state. Robert and his wife, Stella, have grown apart over the years, and unknown to Stella, Robert has had a relationship with his Secretary, Willa, for the past 7 years. Robert had his Will changed so that Willa would inherit everythingand Stella would not receive anything. Robert was killed in an accident and when the Will was read leaving everything to Willa, Stella contacted her attorney and was given 1/3 of the estate, contrary to Robert’s wishes, under the state law.
Only 27% of Americans have a Will, however most people should have a Will as the Will passes any assets that a persons owns in his own name. It doesn’t pass jointly-owned assets, or assets in a living trust or other such instrument.
Even though most states allow a person to write their Will in their own handwriting, it is still better to have an attorney draw up a Will as the laws governing Wills vary by state.
Although a person can leave any assets they own to anyone they wish, some states will allow a widow to claim a part of the estate through a procedure called “The Widow’s Election”, and some states give preferential treatment to descendants. State laws differ on the question of naming disinherited heirs in the Will, so if one wants an heir disinherited, they should research the state law.
NOTE: In order to be sure that no widow was every completely disinherited by her husband, many states have Widow’s Election laws. It must be noted that this is an ACTIVE (not a passive) election. If a Widow has been completely disinherited, the Widow can go the Probate Court and file the Widow’s Election – it is not done automatically Also, the Widow’s Election pertains only to those items in the probatable estate, i.e. those items that pass from the Will. For instance, it would not include a house that the decedent owned jointly with some other person, or a bank account owned jointly. Insurance proceeds and pension plan proceeds are generally outside of the Widow’s Election.
In any event, a person may not libel anyone by making a disparaging statement (such as: “It gives me great pleasure to leave nothing to by son-in-law who has been cruel to my daughter, stolen from my family, beat his children, and who does not deserve to be a member of my, or anyone else’s, family.”) Such a statement can lead to a lawsuit.
The Will should be kept in an attorney’s office. It can be changed or re-written at any time by a person with a sound mind, however it is better to write an entire new Will and destroy the old one.
Upon the completion of the previous section, this text shall discuss using Wills for the transfer of property at death. Wills have recently come under severe criticism and many believe are quite antiquated. The planner must decide the good and “not-so-good” points of Wills and use such information at their own discretion.
Wills: A Will is a set of written instructions drawn under legal formalities that directs how a person's property will be disposed of upon death. Wills are fraught with technicalities and very formal procedures.
History of Wills: Most of the law of Wills used today are steeped in English tradition. For many years common folks were unable to leave all their property to there loved one's. Upon their deaths, much of their property passed to royalty. In A.D. 1540, the English Parliament passed the Statute of Wills, which allowed common folks the right, under a body of rules, to pass all their property to others on death. The legislation was revolutionary and led to many new rules. As cases followed the laws of Wills became numerous and complex. Thus the reason for its complex nature in today's society.
A Will only controls property belonging to its maker. There is, however, an exception to this rule. If someone else left property for one to use during their lifetime and specifically gave that person the right to dispose of it on their subsequent death, that person would have a "Power of Appointment," the person entrusted with this power would have the right to say in his/her Will who gets that property.
A Will controls the passage of property to others on its maker's death. Wills do not control property that goes to others by other planning devices or by operation of law. Jointly held property, for example, is not controlled by a Will. Jointly held property automatically belongs to the other joint owners on death. The same is true for property owned in tenancy by the entirety. Life insurance proceeds are not controlled by a Will if the owner names a beneficiary other than his/her estate.
Wills which are prepared in one's own handwriting are called “holographic Wills” while an oral Will is a “nuncupative” Will. A Will with two makers to dispose of their property on the death of the second maker in referred as a “Joint Will” A “Codicil” is an amendment to a Will. Keep in mind that homemade Wills rarely work and joint Wills can create planning nightmares, especially in the areas of taxation. A codicil is a way to alter a Will without preparing a new Will but codicils must be signed with all, and no less than all, of the formalities of a regular Will.
There are three other terms we must become familiar with before discussing Will requirements and advantages of a Will, these are:
WILL REQUIREMENTS: Five general requirements:
CONSUMER APPLICATION
Walter had four sons and his property is to be distributed Per Stirpes according to his Will. Before Walter’s death, his oldest son died from a lingering illness. This son was married and had stipulated in his own Will that his property would be passed to his daughter. Upon his death, his share of Walter’s property would be passed to his daughter. Therefore, Walter’s property is now owned by his 3 sons and his granddaughter.
CONSUMER APPLICATION
If Walter (see above) had left instructions in his Will for his property to be distributed Per Capita, after Walter’s death, his four sons would inherit the property. Upon the death of the oldest son, the property that was inherited from Walter would be redistributed and each of the surviving sons would own 1/3 of the property.
To summarize, the use of per stirpes and per capita provides a precise way to create a property distribution pattern.
A Will may be contested. This would be an attempt to have the Will set aside through legal channels. Any interested party (anyone who stands to gain if the Will is overturned) can contest the Will. There are six possible grounds.
4. Forgery: As an example, the Signature at the end is not testator's.
5. Revocation: Testator revoked the Will prior to death.
Special Note: The aim of contesting a Will is to destroy the entire Will. Electing to take against a Will, on the other hand, gives the spouse a certain portion but leaves the rest of the Will alone.
Although the Will "industry" has been under constant criticism since the publication of Norman F. Dacy's national best-selling book entitled "How to Avoid Probate", there are nine advantages of preparing a Will:
Wills are only effective on death and may not control all property. They involve complex legal rules and must go through Probate. (This fact, in itself, should give reason to look at Will preparation with a critical eye).
The primary disadvantage of a Will is that all Wills must go through Probate. Please remember, as discussed in Chapter One, Probate can be a needlessly expensive and a time consuming process that can be avoided. The use of a Will guarantees Probate. Many planners in the past believed estate planning was Will planning. Things have changed.
A Will is but one method of disposing of property upon death. Unfortunately, many people give little or no thought to other methods as they relate to the estate planning process.
In order to illustrate problems with Wills we will have an estate planner - Ken - meet with his client - Jim - and ask a few questions typical in the estate planning interview.
Estate Planner, Ken: “Well Jim before we can make any recommendations, we need to know what you own and how you own it.”
Jim (Client): “Ok. What do I own? Well, Betty and I own our home. The deed is in both our names as joint owners. That should be okay because that's the way our realtor said it would work best. Oh! we also have savings account, four of them. One is in both of our names - jointly held. One's just in my name. The other two are with the kids, one in my name with our son, Bob; the other is in our son Jamie's name, but Betty and I are both on it as well. The person at the bank said it would be better this way. Something about our being custodians, but I think we're all on with the kids as joint owners.”
Estate Planner. Ken: “Are you sure exactly how the accounts read, Jim?”
Jim: “Not really, but there's not much there. Then, we have life insurance. There's my group at the office. That goes to Betty and then to the kids if she dies before I do. I also have my G.I. insurance. That goes the same way. I also have two other policies. One's not too large, but it's permanent insurance and the other in six figures. It's term and they both go the same way.”
Ken: “What else do you have?”
Jim: “Our checking, one's joint; one's in Betty's name. I've got my pension and profit sharing plan at the company. I signed a card at the Personnel Office. I think the proceeds go to Betty and the kids.”
Ken: “What else do you have Jim?”
Jim: “We have the cabin. That's in our names with my brother and his wife jointly. Some stocks, some in Betty’s and my name; some we put in the kid's names. One's with my sister and both names are on it. That's about it!”
Ken: “Any personal possessions?”
Jim: “Oh. Do we ever. Two cars in both names, furniture, furnishing, you know, my stamp collection, been collecting since I was a kid; clothing. The usual stuff. I don't know who owns it. I guess we both do.”
Ken: “Thank you Jim.”
(At this point, it would be proper to review Jim’s assets again in order to determine exactly how they are titled, and whether or not Jim's new Will can control them on Jim's death or whether they will go directly to others because Jim used an alternative method of planning.)
Residence Joint with spouse
Savings accounts
No. 1 Joint with spouse
No. 2 Jim's name
No. 3 Joint with son
No. 4 Joint with spouse &son.
Life Insurance All policies have named beneficiaries:
spouse and children.
Checking Accounts.
No. 1 Joint with spouse
No. 2 Spouse's name
Pension and Profit Beneficiaries on cards
Sharing accounts at work Spouse and children
Cabin Jointly between families
Personal Possessions
Cars Joint with spouse
Others Who knows?
Reviewing this summary leads to some obvious conclusions. Those items that Jim owns solely in his name will be controlled by and pass under the terms of his Will. The balance will automatically pass by contract or by operation of law:
The obvious point is that the only property that Jim's Will can control would be one savings account and the personal property deemed to be owned by Jim as his death. Wills may not control the disposition of property as much as a client might think. The key point is that a Will is but one tool available to the client and the estate planner to dispose of property on death.
Will planning is Will planning and is only a part of estate planning. Estate planning envisions how those "other assets" will pass. How they will pay or avoid tax, to whom they will pass and how they will pass.
It is important to understand that other planning techniques are of critical importance. (The other techniques are, in reality, Will substitutes).
To summarize, a Will is but one golf club in the estate planning golf bag; a club which should be used only in the appropriate situations to make the right shot.
The following “quiz” has been used by some Estate Planners to “test” their clients regarding Wills. There are no “trick” questions here, and if nothing else, it will point up to the person taking the “quiz” that there is a lot of misinformation about Wills floating about. Answer True or False. The answers appear after the “quiz.”
CONSUMER APPLICATION
Al Worthington and his wife, Bess, decided to make out a Will. They had one child, Bob, and their property was set up so that it would automatically transfer to Bob if they should both die. Their Bank Accounts were in joint names with their son, and their investments were set up in Trust for Bob. Therefore, being a relatively young couple, they felt they did not need a Will.
However, Bess became pregnant again and presented Al with Twin Daughters, Rhonda and Renee. Bess’s mother died soon after the twins were born, and left Bess with a small farm in Indiana valued at $250,000, and other articles worth about $100,000. The farm had a Manager already in place that had worked for Bess’s mother for many years, and was willing to continue as a tenant farmer.
In talking over the inheritance from Bess’s mother with their Attorney, it was pointed out to them that without a Will, if Al and his wife were to die before the children were grown, the court would appoint a guardian. The farm would probably be distributed 1/3 to each of the children, and then if one of them wanted to sell the farm, or to live on the farm, there would be family problems. Therefore, Al and Bess elected to make out a simple Will for the present, and then to update it as Al & Bess’s net worth grew in the future. In the meantime, they would leave the farm to be sold and the money from the sale to be evenly divided among the children. They felt that as the children got older and if one of the children wanted to live on the farm, they could make changes at that time.
An example of a Will for them would read similar to the following Simple Will. (This is for illustrative purposes only, and may not meet all of the requirements of some states and should not be used as a template without local legal opinion Bess would also have a similar Will. )
SIMPLE WILL
LAST WILL AND TESTAMENT
OF
Albert T. Worthington
I, Albert T. Worthington, born Aug. 23, 1967, residing at 1154 Oak Lane, Clearwater, Country of Pinellas, Florida, 42567, hereby revoke all wills and codicils heretofore made by me and I now publish and declare this to be my last will and testament.
I hereby designate Bess Worthington the Personal representative of my estate. I request that my said Personal Representative be permitted to serve without a bond or with a bond in the smallest amount allowable. In the event Bess Worthington fails to qualify or ceases to serve as a Personal Representative, I designate Grand National Bank as Personal Representative of my estate.
I direct that the expenses of the administration of my estate, claims duly allowed against my estate, and all death taxes levied or assessed against my estate, against the beneficiaries under this will, or against any person by reason of the ownership of property included in my estate for tax purposes, be paid, or provision made therefor, out of the residue of my estate and not charged against any particular beneficiary (including, but not limited to, any joint owner, any insurance beneficiary, or any other owner of property included in my estate for tax purposes),other than the beneficiaries of the residue of my estate.
I hereby devise all of my tangible personal property including, but not limited to, my jewelry, clothing, objects of art, personal effects, household goods and furnishings, and automobiles to my wife, Bess W. Worthington if she survives me; if she does not survive me, then I devise such property to my children who survive me in equal shares, or all to the survivor of them.
I devise the residue of my estate to Bess Worthington if she survives me; if she does not survive me, then devise such property equally to my children who survive me, or all to the survivor of them.
If my spouse does not survive me, I hereby request my brother, Bryan L. Worthington be appointed as Guardian of the person of any child of mine who survives me and who has not attained the age of twenty-one (21) years at the time of my death.
In the event Bryan L. Worthington fails to qualify or ceases to serve as such Guardian, I hereby request that my sister-in-law Elizabeth Sunderson be appointed at Guardian of the person of any such child.
In extension of and not in limitation of the powers given by law, my Personal Representative shall have all powers granted to trustees under the laws of the State of Florida and the following powers with respect to the property of my estate to be exercised in the discretion of my Personal Representative without prior authorization or subsequent approval of any court. All powers and discretion’s bestow on my Personal Representative herein may be exercised by any joint, alternate or successor personal representatives.
IN WITNESS WHEREOF, I have subscribed my name to this, my last will and testament, consisting of 3 typewritten pages, affixing my initials to each of said pages for better identification, and I have this called upon
James T. Applegarth
Hilda Rassmussen
Pam Dirthwilder
as witnesses to the same at Clearwater, Florida, this 14 day of April, 1998
___________________________________
(Albert T. Worthington)
The forgoing instrument was signed, sealed and acknowledged by the above-named Albert T. Worthington, and for his last will and testament in our presence, and we, at his request, in his presence and in the presence of each other, have subscribed our names as witnesses thereto this 14th day of April, 1998.
________________________ residing at 2222 Oakview, Clearwater, FL
(James T. Applegarth)
_________________________ residing at Route 3, Box 34, Ocono, FL
(Hilda Rasmussen)
__________________________ residing at 5777 U.S. 19, Seminole, FL
(Pam Dirthwilder)
The purpose of estate administration is to resolve decedent's responsibility and transfer all property.
There are eight steps in the settlement process. Steps are basically the same whether a person dies with a Will or without one.
Many States have provided a method of simplified administration for small estates. The Probate court must give its approval and the beneficiaries of the estate must agree to this method.
The specific requirements for simplified administration will vary by state. Unless this simplified methods is used, the administration of the estate will occur under the supervision of the Probate Court.
While it can be a simple decision to name a Personal Representative, a well thought out process should take place. The Personal Representative acts in behalf of the estate owner. Usually an individual's first option will be a spouse (which could be the worst choice of all). A bereaved widow(er) will not always make the best Executor especially if she or he does not know the way finances work. Sometimes another family member - possibly an adult child - would be a better choice. The advantage of naming a family member is that this person will be sensitive to the family's situation. A corporate Executor probably will not have the same insight as the family member. The disadvantage of naming a family member is that they could possible be hindered by family heirs.
If objectivity and impartiality are important considerations, then some consideration of a corporate Executor should be made.
Bank Trust Departments have specialists in estate administration. They are experienced in the Probate process and are familiar with competent appraisers who may render the various assets in the estate a much needed service.
State laws usually do not allow a Personal Representative authority to continue to operate the decedents business. Although the decedents will may provide the authorization, the Personal Representative must be extremely careful while doing this. Any downturn in the business could cause the heirs to resent this and could lead to many problems for the Personal Representative.
A notice to creditors is usually published in a commercial newspaper. This method presumes that the creditors will be aware of the tentative nature of the estate and should file any claim against the estate. Most states have a cutoff for such claims. If a claim is not filed with the court within six months after publication of notice, the Personal Representative need not honor the claim. This allows some estates to be settled quickly.
Probably the most difficult part of the Executors responsibility is to gather all the decedent's assets and then place a valuation of each item. Some of the assets will not be difficult to value. Life insurance, retirement benefits, etc, but real estate, long held securities, family heirlooms all have valuation problems. For this purpose the use of qualified appraiser is most important in the valuation of property.
When long held stock must be valued often times a local library can be of assistance or contacting directly the issuer of the security is needed. Appraiser's fee are paid out of estate assets as they are a necessary expense to the estate and are also tax-deductible as an estate Administrator expense.
Oftentimes in larger estates the Personal Representative will be required to make investments. Since the primary duty of a Personal Representative is to conserve estate assets speculative assets will be frowned upon.
The Personal Representative is responsible for filing a federal estate tax return. A state death tax return for the estate, and the decedent's final income tax return for the year of death must also be filed.
If the Probate court approves the final accounting, it will sign a decree of final distribution which finally authorizes the distribution of the net estate to the heirs (intestate) or beneficiaries (Will).
The court must be satisfied that all the debts, expenses and taxes have been paid and that the distribution is in compliance with the intestacy laws or wishes of the decedent's Will. Any premature distribution by the Personal Representative could expose them to liability if a disgruntled beneficiary finds out.
Part of the estate expenses will be Executor's own fee. This fee is usually a declining percentage of assets under estate administration. At times individual Executors often waive the fee as a favor to beneficiaries especially if a family member has been charged with settlement of the estate. Executor's fees are chargeable against estate assets, and are estate tax deductible.
To summarize, it is important for the planner to review the duties of an Executor/Personal Representative before recommending such a responsible position to clients. Most individuals will become Personal Representatives before discovering the immense responsibilities associated with such a position. It is important to keep in mind the three important objectives of the Personal Representative job:
CHAPTER 5 - STUDY QUESTIONS
1. When an individual dies their property can pass by contract designation, an example would be
A. a codicil.
B. a life insurance policy.
C. joint tenancy with the right of survivorship.
2. A trust agreement
A. is an example of transfer by contract.
B. provides for the beneficiary to hold legal title to property.
C. is created by the grantor for the benefit of the trustee.
3. Prenuptial Agreements
A. are used by spouses to take advantage of the maximum marital deduction.
B. are only legal in community property states.
C. make it possible for individuals who wish to marry but also wish to leave their property to loved ones prior to taking their marriage vows.
4. A Will
A. controls the passage of property to others on its maker’s death.
B. controls the disposition of jointly held property.
C. must be prepared by an attorney.
5. Dying without a Will
A. is called dying testate.
B. means the person’s property will go to the state.
C. is call dying intestate
6. The primary disadvantage of a Will is that
A. the testator may transfer real and personal property as they wish.
B. all Wills go through Probate.
C. all property the decedent had an interest in, must be accounted for in the Will.
7. A Will may be contested for
A. improper execution.
B. incompetent beneficiary.
C. the maker of the Will is over the age of 65.
8. The person responsible for administering the estate is the
A. testator.
B. executor (male) / executrix (female).
C. the probate judge.
9. A Codicil
A. is an informal Will.
B. is an amendment to a Will.
C. doesn’t require any formal procedures.
10. Which of the follow statements about Wills is true?
A. A Will does not go through the probate process.
B. The testator may transfer real estate, stock or business interests as they wish.
C. With a Will a person can disinherit their spouse.
Answers to Chapter 5 Quizes: 1B, 2A, 3C, 4A, 5C, 6B, 7A, 8B, 9B, 10B