  
|
Introducing my new book, The AARP Crash Course in Estate Planning. Learn More or buy now |
 |
I. THE DISPOSITION OF PROPERTY, WITH OR WITHOUT A WILL
C. The simple, “reciprocal” Will
D. No special format or "magic words" are required for a valid Will
I. THE DISPOSITION OF PROPERTY, WITH OR WITHOUT A WILL
(NOTE: To make things simpler at the outset, we defer consideration of Trusts until Section III, after exploring some preliminary topics. Therefore, when we examine, below, what happens when there is no "Will", we assume there is no Trust, either. Meanwhile, just keep in mind that a Trust can be a "Will substitute," in arranging for your survivors and the disposition of your property.)
If there is a Will, distribution of property comprising the decedent's probate estate is ordered under the terms of his/her Will. If there is no Will, the property is distributed according to the state law of intestacy. (Note that one who dies with a Will is said to have died "testate,” and is called the "Testator." A decedent without a Will has died “intestate.”)
What is included in one's probate estate? All solely owned property, plus any and all other property interests that do not pass to somebody else by operation of state law. (E.g., If a house is held jointly with right of survivorship, the survivor gets 100% ownership at the very moment of the other owner’s death. The house would not be part of the decedent's probate estate.) But, as you will see later, there is a BIG distinction between one's probate estate and taxable estate. AVOIDING PROBATE DOES NOT MEAN AVOIDING TAXES!
If you have minor children, definitely. If not, probably so. It depends. Do you know whether your personal wishes are exactly in line with the law dictating who gets what, when people die intestate in your state? If your intent differs from the law, you had better have a Will. Please avoid the following excuses:
“Everybody already knows who’s supposed to get what.” OR
“In my desk drawer there’s a list of my possessions, and the persons to whom they should be given.” OR
“I don’t have much. The kids can just come in and divide it among themselves however they decide.” OR
“I put name tags on the bottom of every nick-knack and piece of furniture, so
they’ll know who gets it.” OR
“Last year I put all my money in a joint account with my oldest daughter. After I die, she knows to split it three ways with her brothers.”
All the common situations above (and any others you might add) are prescriptions for trouble, for various reasons. There is simply no way for anyone to enforce your intended plan if it is not contained in a Will. Families can be forever torn apart, jockeying for position over the distribution of even small amounts of property.
Many people acknowledge the pitfalls - for others - of not having a Will. But their kids, so they say, would respect the parents’ wishes and never stoop to fighting over the estate. Even if these folks are right, what about the kids’ spouses? In-laws (sons and daughters, particularly) can be a problem. Whether it is well intentioned or not, meddling is a specialty with some of these people. Unless you spell out your wishes in a Will, the door may be open, for example, for your pushy son-in-law to have his say about things, or to pressure your daughter. Never mind that the issue is absolutely none of his business!
Do you care who your personal representative will be? Somebody must be given responsibility and the necessary authority to preserve, gather and distribute your assets in accordance with the formula provided by your Will, or by state law, if you die intestate (without a Will).
If you die intestate, the court will choose the person responsible for wrapping up your affairs. This person is called an Administrator, and might not be the person you would have wanted. Sometimes, sadly, family bickering develops over who should be appointed by the judge. Often, a neutral lawyer is appointed, and must be paid with estate funds. So, one important function of the Will is to name this "wrapper upper," who is called the Executor (or Executrix, if female) of the Will.
The following general property distribution scheme may be helpful to show what happens to the probate estate if one dies without a Will. State laws vary greatly, however, and contain significant details not covered here.
For example, most states provide an allowance to be set aside for the surviving spouse and/or children - whether there is a Will or not. This is usually a fairly modest exemption, free from any claims against the estate or debts of the decedent. These survivors take a specified dollar amount "off the top" of the estate, before the creditors, heirs and beneficiaries line up to receive their shares of what remains, under the Will (if there is one) or the state law of intestate distribution (if there is no Will). These allowances vary greatly among states, and can be significant (e.g., $20,000 in Florida; $60,000 in Ohio). If there is no Will, many states also give the surviving spouse a specified interest in any real estate owned by the decedent (e.g., "one-half," or, a "life estate").
What happens if you die without a Will while you are:
1. Married with children: Many people falsely believe that the surviving spouse/parent would take all the deceased spouse's property, especially if the children are young. That is not the case. In this situation, the law of most states awards one-third to one-half of the decedent's property to the surviving spouse, and the remainder to the children, regardless of age.
2. Married with no children: Again, there is a popular misconception that the intestate decedent's surviving spouse would take all. Most states, however, give only one-third to one-half of the estate to the survivor. The remainder generally goes to the decedent's parent(s), if alive. If both parents are dead, many states split the remainder among the decedent's brothers and sisters.
3. Single person with children: When a single person with children dies without a Will, state laws uniformly provide that the entire estate goes to the children.
4. Single person with no children: In this situation, again, most state laws favor the decedent's parent(s) in the distribution of his/her property. If both parents are deceased, many states divide the property among the brothers and sisters.
If there is a Will, the surviving spouse can renounce it and the inheritance it contains (if any), and instead elect to take a share of the estate specifically provided by state law. This is a legal device originally intended for the protection of the wife. Historically, all of a family’s property might be titled solely in the husband's name. The "elective share" protects a woman (or man) against being "written out" of a spouse's Will.
For example, a husband might have all the couple's property in his name alone, and write a Will directing all of it to his children by a previous marriage. The wife could file a petition in probate court to take her "elective share" of the estate under state law. Usually the surviving spouse can take about one third to one half of the estate. That share varies among the states, and so does the definition of "estate" that is used in the calculation. Also, state laws contain a very wide variety of significant details, limits, dollar allowances and exceptions. These are all involved in determining what and how much property the surviving spouse can elect to take from the deceased spouse's estate, instead of whatever he/she is left in the Will.
When there are minor children, a Will should always be used to name a guardian(s) of their persons and property. Alternates should also be named. This should not be done any other way. Of course, if there is a surviving parent, he/she automatically is guardian, if living in the same household. In a divorce situation, the parent with legal custody of the child(ren) should designate a guardian. Understand, however, that if somebody besides the other parent is named, this designation might not be binding; when a custodial parent dies, the non-custodial parent always has priority in seeking guardianship and custody, unless unfit.
Be aware, too, that the court will probably have to approve the proposed guardian eventually, even if named in a Will (unless he/she is the surviving parent, in the same household). The purpose of the Will in this regard, though, is to guide the court, and to avoid family arguments over who is better qualified.
If you feel it is necessary or appropriate, two guardians can be appointed - one over the child himself, and one (presumably experienced) over the child’s property. Consider carefully, however, the appropriateness of leaving money or other property outright to young children, even if a qualified guardian is available. Guardianship is a cumbersome way to manage financial affairs. Periodic reports and accounting to the court are required, and flexibility is limited by law.
More important, for many, is that guardianship ends at the age of legal adulthood (usually 18, sometimes 21). From then on, any property left to a child is exclusively owned and controlled by him/her. People easily recognize that it is bad to die intestate, unintentionally leaving half (or more) of everything to small children. Sometimes they forget it might be no better to die with a Will, if it allows the same result, i.e., leaving property to minor children. That is often what happens when both parents die prematurely. With or without a Will, those kids grow up to be 18 year old boys and girls, at which time the guardian must turn over the money (or other property).
If significant assets are to be committed immediately at death to the direct benefit of your children (as opposed to their surviving parent), a Trust is the way to go. We will explore later several ways in which the surviving parent (or any mature adult) can also benefit from a Trust. But a Trust is a must to keep your estate from eventually falling into the hands of teenagers, if you have left your children money and die while they are young.
F.Y.I. Guardians are not legally
obligated to support the decedent's children out of their own pockets, and
might not be able to, anyway. Public welfare benefits might be available, but
it is unwise to rely on them as a first option. So adequate funds, through life
insurance or otherwise, should be available to care for your kids.
C. The
simple, “reciprocal” Will.
This is what most married couples first think of. Each spouse's Will is a "mirror image" of the other. IF the combined estates of both spouses total under $1.5 million, this may be all you need. (For those who die in 2004 or 2005, $1.5 million or more in estate value is the point at which federal estate taxes become a factor to be concerned about. More later.)
This kind of Will provides as follows:
1. Naming of Executor - usually the spouse, but there should be an alternate, too.
2. Payment of debts and taxes.
3. Specific bequests of tangible property, e.g., "Cousin Jethro gets my Shakespeare collection." (What happens if the collection is sold before death? Does Jethro get the cash equivalent instead? Generally not, under state law. But will Jethro want to argue about it anyway?)
TIP: Avoid disputes by adding the
simple words, “....... if owned by me at my death.” Then, it is clear there is
no bequest at all, unless the property is still owned by the Testator
when he dies.
4. Disposition of the remainder (“residue”) of property.
This consists of everything that remains after steps 1 through 3, above. Usually, people want it this way: "If I die first, everything goes to my spouse. If my spouse has already died, all to my descendants, in equal shares, per stirpes." (Latin for, "If a child dies before the parent, that child’s children split the share.") The Wills are mirror-images of each other.
People often ask what happens if a beneficiary of a specific sum or item under their Will dies before they do. It is difficult to give a short, general answer - but the situation can lead to a dispute, unless the Testator (Will maker) plans for it. The best solution to this potential problem is simply for the Will maker to name a contingent beneficiary, in case the primary beneficiary does not survive the Will maker. Alternatively, the Testator can specify that if a beneficiary fails to survive, his/her share or item is to be included and distributed with the "residue" of the estate.
A question of many parents with young children is: "What happens if we both die at once?" The answer, of course, depends on whether any planning has been done. The most important planning, however, is practical, not legal. First, have you found a capable and willing guardian for the children? Secondly, are funds available to support them? Without a good answer to both questions, legal advice is not going to help much.
Most simple Wills prepared for parents have a clause to deal with the "common disaster" situation. Each spouse's Will says, in effect, “All my property to my spouse, IF he/she survives me by at least 30 days. Otherwise, all to the children.” (There's nothing special about using "30 days," but the period should always be less than six months. If it is longer, the tax-free status of the property transfer to the surviving spouse could be lost.)
To analyze the result in a common disaster, focus on one parent at a time. Look at the wife; in a common disaster, the husband will not survive her by 30 days. So none of the wife's property would pass to him. It would pass to the alternate beneficiaries instead -usually, her children.
Now look at the husband's Will the same way. In a common disaster, the wife will not survive him by 30 days. If his Will, too, requires the spouse to survive for a certain time, then none of the husband's property would pass to her. Again, it would go to the alternates - the husband's children.
Often, of course, wife and husband have the same - and only the same - kids. The Wills are mirror images of each other. Then, this explanation has little significance. The couple's children end up with their parents' estate no matter how we look at it.
But what if either or both the wife and husband have children from a previous marriage? In that case, their Wills are very often not mirror images. Each spouse has probably brought individual (separate) property into the marriage. Each might want the current spouse to have use of that separate property, too - if the current spouse survives. If the current spouse is already dead, though, each parent might wish to leave that separate property only to his/her "previous" children. It can then make a big difference which spouse is presumed to die first.
Suppose, for example, that the husband already had a son and $100,000 in the bank when he married his second wife. The son is doing well, and does not "need" the money. The husband, therefore, thinks first of his wife in making his Will, and leaves that $100,000 to her, along with everything else. She is the primary beneficiary.
But if the wife is already dead at the time the husband dies, she does not need the money, either. Dad feels that if it works out that way, then he does want his first son to get the cash. It is listed as a separate item in Dad's Will, and the first son is named alternate beneficiary of that money.
What would happen if husband and wife die together in an accident? The spouses' Wills have the frequently-used clause, explained above. When the Executor of the husband's Will begins distributing property, he can obviously see that the wife has not survived for 30 days after her husband's death. Therefore, she inherits nothing. The husband's estate is divided among his children, as directed in his Will. The $100,000 bank account has been earmarked for the first son, as the alternate, and it goes to him, as planned. Once again, the Will's survivorship requirement ("To my wife, IF she survives me by 30 days . . . ) produces the desired result.
Now let's look at another scenario. Assume the survivorship requirement in the husband's Will is different. The Will says, "Everything to my wife, IF she survives me." There is no mention of 30 days. Assume further that an additional survivorship clause has been used: "If we die together, and the order of death cannot be determined, my wife is presumed to have survived me."
F.Y.I. This arrangement is
sometimes a good idea. Why? Because unless property is left to the surviving
spouse, the unlimited marital deduction for calculating federal estate tax
cannot be taken. If the spouses’ estates are different in size, but total
over $1.5 million (in 2004 and 2005), this can result in needless tax. (More later.)
The outcome is different if the wife is presumed to survive. This time, the husband's Executor is instructed by that clause to distribute property as if the wife were still alive. Never mind that she lived only a minute longer. She takes everything under her husband's Will, including the $100,000 he wanted his first son to get if the wife did not need it.
Now that money must be formally transferred to the wife - as if she had outlived her husband by ten years instead of a minute. It is lumped in with the rest of her property. Then everything - including the $100,000 - is distributed to her kids, according to her Will. Her Will does not mention the husband's son by a previous marriage. That son would get absolutely nothing.
Most states have adopted the Uniform Simultaneous Death Act. This law would dictate the order of death when parents die together. But the law is used only when the spouses' Wills say nothing about who survived whom - or if there are no Wills at all. Each spouse would be treated by the Simultaneous Death Act as though he/she were the survivor. With the other spouse presumed to be gone already, nothing would go from one dead parent to another. This is the same outcome as achieved with the language used in most simple Wills, discussed above.
Note that if there is no Will, property is distributed according to the state law of intestacy. The Uniform Act does not specify who gets what. It pertains to the order of death only. Once that is determined, state law or the Will takes over to control the actual distribution of property.
The Uniform Simultaneous Death Act provides that if an insured person under a life policy and a beneficiary die at once, the insured will be presumed to have survived, unless otherwise provided. In that case, the policy proceeds would go to the alternate beneficiary, so remember to name one.
D. No
special format or "magic words" are required for a valid Will.
To qualify as a Will, it must appear to the court - looking only at the document itself - that it was intended to be the final expression of the Testator's wishes as to the disposition of his/her property to take effect upon death. That is why a general letter stating one’s desires, or a list of property with beneficiaries names usually is insufficient.
Most importantly, the Will maker must have "testamentary capacity." Under the law of most states, this requires that the Testator be of "sound mind," which might be a misleading term. He must only be aware of the nature and extent of his property, and of the "natural objects of his bounty." He must understand, for example, that he has three children and four grandchildren, who would "naturally" be those to whom a person would leave his/her estate. (But that does not mean this Testator must do so.) Additionally, the Testator must be aware that by signing the Will, he is making a final disposition of his property.
It is significant to point out that the Testator is not required to be mentally "sharp" or reasonable or fair. He must only know what he is doing, to the extent described above. If he does, the law will respect whatever disposition he cares to make, subject to lawful claims that must be paid first, and the rights, if any, of the surviving spouse.
Most Wills recite that the Testator is of "sound mind." That standard clause would not settle the matter, however, if somebody complained that the Testator was mentally weak and under "undue influence" or duress from another party. But the law "bends over backwards" to reject such claims, and uphold Wills that appear to be valid. Never mind if the Testator had been acting quite "funny" in his last months during which the Will was written. Never mind if the Will is unfair and one child is favored over the rest. By themselves, those kinds of facts would virtually never be enough to convince a judge to declare a Will invalid. (If a Will is thrown out, the estate is handled as if there had never been one to begin with.)
Attorneys are frequently consulted by adult children, concerned because their parents have no Will. Often, the mental condition of the parent in question is deteriorating rapidly, but there are still "good days." The law makes it perfectly proper for the Testator to execute a Will during such a "lucid interval," if testamentary capacity truly exists at the moment of signing.
If typed, the Will must be signed in the presence of two (in most states) witnesses, who must sign in the presence of the Testator and each other. Such a Will may be self-proving if it contains notarized clauses in which the Testator and the witnesses make certain formal recitals. In a nutshell, the parties affirm that all of them are within sight of each other, that the Testator is of sound mind, knows he is signing his Will, and has asked the witnesses to so attest. No witnesses would then have to appear in court to verify the document.
Some states allow holographic Wills - in which the significant portions must be entirely written in the handwriting of the Testator - with no witnesses required. Contrary to popular belief, however, many states do not permit such Wills.
“Codicils” are amendments to an earlier Will. No written additions or changes should ever be made on the original document, however. Instead, a separate page should be prepared, referring specifically to the original Will, and executed with the same formalities required of a Will in your state. Keep the codicil with the Will, and keep it simple. If the desired changes are at all complicated, subject to more than one interpretation, or potentially in conflict with other provisions of the Will, better to just start from scratch and do another Will. (Remember to destroy the old one to avoid any confusion.)
TIP: Read your Will before signing.
If the signature line says "Gustav Balch,” and that is not your name, do
not sign it! (This advice is based on an actual Will we reviewed for an Aunt,
who is not named Gustav.) It is no secret that all law offices use
“form” documents, such as Wills they have previously drafted, as models for
subsequent clients. It would be foolishly inefficient to reinvent the wheel
every day; you are paying the attorney for guidance in formulating and
implementing a plan, not for typing. Obviously, however, editing mistakes can
occur. If something is not right, or if you have any concerns, do not be
afraid to speak up!
The term “community property” often comes up in discussions about estate planning (and divorce). It is a form of property ownership derived from Spanish law -solely between husband and wife - recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (The other states are “common law” states, regarding their marital property ownership system. American common law originated in England.)
Specifics in law differ in significant details from state to state, but the defining feature of community property is this: Irrespective of the name(s) on title documents, ownership of (almost) ALL property - including income from wages and self-employment - acquired during marriage by either spouse is automatically split, so that each spouse owns a separate, undivided one-half interest. (An “undivided” interest is one in which each spouse has half ownership of the whole “pie,” rather than full ownership of only the “left half” or the “right half.”)
In community property states, property acquired by a spouse separately and brought into the marriage remains separate. In these states, too, property acquired by gift or inheritance, or in exchange for separate property or money, also remains separate. The income, if any, the separate property produces is treated differently among the community property states. In California, for example, separate property income remains separate property. In Texas, however, income produced by the separate property of one spouse becomes community property. As a practical matter, commingling of assets can obscure separate property ownership, until it finally becomes community property. This often happens with checking and other financial accounts.
Since the two equal interests of the spouses in community property are separate, each spouse is free to dispose of his/her half of community property in a Will. It does not automatically pass to the survivor, as it would if owned jointly, with right of survivorship. Of course, the deceased spouse’s federal taxable estate contains his/her half of the couple's community property.
The subject of community property deserves the attention of three groups of readers: Spouses who now live in a community property jurisdiction, those who now live in a common law state, but who acquired money or property while living in a community property state previously, and those who now live in a community property state, but who acquired money or property while living in a common law state previously. State laws vary, and these issues can be complex, so be aware that special attention needs to be given to the issue of community property, if you are affected by it. If so, it is important to see a lawyer for guidance in understanding the extent of each spouse's property rights - before attempting to give it away by gift, in a Will or in Trust.
BEWARE ! If the Will of a deceased spouse attempts to dispose of both halves of an item of community property, the survivor might have to go to court to prevent the transfer of the half interest the decedent had no right to give away.
F.Y.I. It is possible in some
community property states for the spouses to change their respective ownership
rights in an asset, from community property to separate property and
vice-versa, simply by written agreement between them.
People who do not live in community property states are sometimes puzzled to learn the definition. It sounds just like the law of property, as they understand it, in their own (common-law) states. After all, most of us know couples in divorce proceedings, in which the court split everything right down the middle. Today, the law everywhere regards marriage as a “50-50" proposition, right? Well, sort of. Divorce law is probably a good way to study the question.
In common law states, the “50-50" outcome that frequently occurs in divorce settlements is not automatic. The goal of the court in these states is simply to be fair. Today, the enormous economic value of the wife’s historical role as homemaker is finally recognized by divorce courts, at least in theory. Very often, therefore, being “fair” does, indeed, boil down to making a “50-50" property split. But there is no requirement that marital property be equally divided in common law states. If, for example, a wife has a thriving medical practice during marriage, while her husband is a lazy bum, he would probably not be deemed entitled to half the money and property acquired during marriage - in a common law state. In a community property state, however, the husband’s actual contribution to the marriage, and to the couple’s marital property is largely irrelevant. He is, by law, entitled to half.
BEWARE ! If either or both spouses is, or ever was a legal resident of a community property state, records should be maintained pertaining to the estate of each spouse prior to marriage, the state of the current marriage, the identity, value and source of funds used to buy property during marriage, as well as the legal residence at the time of acquisition. These are all significant factors in identifying the respective property rights of the spouses, and the situation can get complicated. For example, property acquired separately by a spouse in a common law state is treated like community property (i.e., "quasi-community property") if the couple moves to some of the community property states (e.g., California), even though only one spouse’s funds paid for the asset.
This is a topic that doesn't fit neatly anywhere, but many people ask about it. When a person has a "life estate" in a piece of property (most commonly, a house and the contents within it), he/she enjoys almost the same rights in that property as would an "absolute" owner - but only for his/her life. The idea is best illustrated with a typical example, the "subsequent marriage" situation:
Assume that a widow who owns a home wishes to remarry later in life. It is decided that her new husband will sell his own house, and the couple will live in the wife's home. The new bride wants to ensure that her children, not the new husband or his family, ultimately inherit her property. BUT she also wants to be sure that her husband will still have a place to live, if she dies before he does. So the newlyweds agree that the husband will have a life estate in the house. He can live there until he dies, then the property goes to the woman's children (or to whomever she specifies). As a "life tenant," the husband could do pretty much as he pleased with the house, but would be responsible for maintaining the property in good condition. Of course, he could not sell it.
A life estate can be created in a property deed, a will, a trust, or a pre-nuptial agreement. The best choice depends on the individual situation. But the devil is in the details, and this general explanation leaves many unanswered questions. So if you have a life estate and want to know your rights, or - especially - if you want to give somebody a life estate in property you own, please see a lawyer. There is obviously a lot at stake in seeing that this arrangement works as planned, and it is very easy to foul things up badly trying to "do-it-yourself."
Your comments, suggestions and constructive criticism are welcome.