three major
areas: will execution, intestate succession, and probate administration.
JOINT TENANCY ARRANGEMENTS
The acquisition of title in joint tenancy is ordinarily a
simple matter, requiring the completion of one or two preprinted forms.
Transfers can be done with or without the aid of an attorney. Deeds to transfer
real property into joint tenancy are usually drafted by an attorney, although
in some states the job may be done by a real estate agent, by the title
company, or by an escrow agent. Similarly, when two or more people open an
account such as a stock brokerage account or bank account, the professionals
involved generally will ask whether title will be in joint tenancy or tenancy
in common.
Later in the
text the reader will learn several significant disadvantages to taking title in
joint tenancy. Deciding whether joint tenancy is appropriate is not always
clear; however, our focus at this point is on how title in joint tenancy is
taken, not whether it should be taken.
PROPERTY TRANSFER BY CONTRACT
A significant part of a person’s estate plan may be
transferred pursuant to a contract. Examples of property that is transferred
after the death of the owner (or the insured) are life insurance, pension and
profit sharing plans, and individual retirement accounts (IRAs).
Life Insurance
Wealth derived from life insurance comes in two forms: the
policy itself and the policy death proceeds. The policy may be transferred
while the insured is alive. After the insured’s death, the proceeds are paid by
the insurance company to the designated beneficiaries.
During the
policy application process, the applicant designates the beneficiary who will
receive the proceeds at the insured’s death. Once the policy is issued, up
until the death of the insured, the policy owner can easily change the
beneficiary designation by giving the company written notice using its
beneficiary designation form. Very rarely, there is an irrevocable beneficiary
designation, i.e., the designation cannot be changed without the consent of the
beneficiary or someone besides the owner. Such irrevocable designations may be
the result of a divorce settlement or as a condition of a personal loan. Once
certain conditions are met, the owner-insured may be free to change
beneficiaries, e.g., once the children are grown or the loan is repaid.
Arranging the
transfer of title to a life insurance policy itself from one owner to another
is simple. All that is required is the completion of a short assignment form
that can be obtained from the insurance company.
Pension and Profit Sharing Plans
Pension and profit sharing plans are contracts between the
employee-client and the employer. Ordinarily, the employer requests that the
employee fill out a written form designating the beneficiary, the party who
will be entitled to any benefits paid after the employee’s death. Thus, the
actual process of beneficiary designation for most retirement plans is simple
and straightforward.
WILLS AND TRUSTS
In contrast with the above transfer arrangements, the
document preparation process for the will and the trust are not simple, for two
reasons. First, unlike joint tenancy and written contracts, the will and the
trust are capable of disposing of nearly all the client’s estate, as well as
providing for the care of the client’s minor children. Thus, the will and the
trust will inevitably be more complicated. Second, unlike insurance and
retirement contracts, which are drafted by the insurer or the employer, wills and
trusts are semi-custom, drafted to fit each client’s unique circumstances. The
responsibility for choosing the terms for the lawyer to draft into the will and
trust falls to each individual.
The following
material presents an overview of will and trust construction. Major topics
include the legal requirements for a valid will, common will provisions,
essential characteristics of trusts, and common provisions of the living trust
and the testamentary trust.
THE WILL
Many people die leaving no formal directions as to the
disposal of their property, who should manage their estate, or who should care
for their minor children. In such cases, the state seeks to make these
decisions equitably and sensibly, applying statutory rules to the surviving
family situation. However, state law may conflict with the wishes of a
decedent, whether unstated or even as recollected by the survivors. Compared to
a properly planned estate, intestacy can result in unsuitable property
disposition and higher taxes. Individuals can avoid an undesirable outcome by
expressing, while still alive, their desires in a legally binding document that
serves as a set of directions to be followed by those who survive. The will is
the most common formal document for this purpose.
A will is a legally
enforceable document that expresses the testator’s directions for disposing of
his or her probate property at death. In some states, wills can be oral, but
laws usually greatly restrict the scope of their ability to dispose of wealth,
generally limiting the application of oral wills to personal property worth
less than a modest amount, such as $2,000. In addition, the testator, on
execution, is often required to be a member of the armed forces or in peril of
death. Practically speaking, wills prepared in the estate planning process are
written.
Who May Execute a Will
In most states, any individual 18 or older who is of sound
mind may dispose of his or her property by will. The implications of this are
twofold. First, individuals under age 18 cannot transfer property by will
unless they are emancipated minors. A minor is emancipated if a court, after a
petition and hearing, determines that the child should be free from parental
control and given the status of an adult for contractual and other legal matters.
In most states, a person under age 18 is considered an adult if he or she is
married. Thus, in most instances, a deceased minor’s property will pass
according to the laws of intestate succession, which will usually result in the
property passing to the child’s parents or if the parents are also deceased,
then to siblings. Second, a will can be denied probate if it can be established
that the testator, at date of execution of the will, lacked testamentary
capacity, was subject to undue influence or fraud, or acted mistakenly. These
four concepts are discussed next.
Testamentary capacity. Testamentary capacity concerns the
testator’s mental ability to execute a legally enforceable will. A testator has
testamentary capacity if he or she possesses each of the following three
attributes:
1. Sufficient mental capacity to understand the
nature of the act being undertaken (executing a will).
2. Sufficient mental capacity to understand and
recollect the general nature of his or her property.
3. Sufficient mental capacity to remember and
understand his or her relationship to the persons who have natural claims on
his or her bounty and whose interests are affected by the provisions of the
will.
Essentially, in
addition to being an adult, testators must know that they are executing a will,
they must be aware of what they own, and they must be cognizant of family and
friends. On its face, this test seems quite severe; strictly construed, it
might prevent many older testators from executing a valid will. However, mere
age and physical disability do not negate testamentary capacity. Probate courts
have admitted to probate wills executed by individuals who were forgetful,
absent-minded, alcoholic, or behaving peculiarly—even persons declared mentally
incompetent, insane, under conservatorship, or who committed suicide shortly
after executing a will. Indeed, the threshold is lower than that for
contractual capacity, which may be as it should, given that the formation of a
contract requires the ability to negotiate with another person, whereas
executing a will does not. Nonetheless, failure to meet one or more of these
three requirements will result in a finding of insufficient testamentary
capacity. Examples of sufficient evidence of incompetence include senility, ongoing
hallucinations, irrational beliefs, irrational behavior, and totally groundless
beliefs about the testator’s spouse, children, or other family members.
Generally, the outcome hinges on whether, at the time the will was executed,
the three-prong test was met. Appellate courts are reluctant to “set aside” a
will. They have reversed many cases where the jurors found that the testator
lacked testamentary capacity, especially those cases where the testator
disinherited immediate family members in favor of newly found friends. As a
consequence, affirmed findings of testamentary incapacity are very rare.
Anticipating the
possibility of a will contest based on lack of testamentary capacity, some
attorneys videotape the will execution of a testator who may have questionable
capacity, believing that the taping will make capacity more credible. Others
believe that videotaping can enhance the success of a contest, reasoning that
testators may look terrible on the screen (especially if they are shown lying
in a hospital bed), and that the taping constitutes evidence that even the will
drafting attorney lacked confidence in the testator’s capacity.
Undue influence. A will executed by a
testator who was subject to undue influence by someone who stands to benefit, directly
or indirectly, may also be denied probate. Undue influence is influence by a
confidante that has the effect of overcoming the testator’s free will. Examples
include improper persuasion and psychological domination, as when “Snake Oil
Sam,” the smooth-talking newcomer, makes a romantic play for the 92-year-old
widow, “encouraging” her to disinherit her children and leave her entire estate
to him.
Winning an undue
influence case can be difficult. These cases often involve a person with a
weak, unsound, or impaired mind. Indeed, the family may not be aware of a new,
less favorable will until after the testator is dead. An element of fraud or
deceit is a common thread in these cases. Juries tend to side with family
members against outsiders whom they see as meddling non-relatives. Thus, a jury
is likely to “rewrite” a will in keeping with what the jurors think is fair to
the family. But, unless the evidence of undue influence is clearly in the
record, this type of verdict is likely to be reversed on appeal.
Fraud. Fraud involves deception through false information. Some courts
distinguish two types of fraud based on the action of the deceiver. Fraud in the inducement is where the
testator is persuaded by lies of the wrongdoer to change his or her estate plan.
For example, fraud exists if a niece tells her great-uncle she is penniless
when, in fact, she is wealthy, or a daughter incorrectly tells her mother that
her sister instigated a conservatorship proceeding, when actually they acted
together. The other type is called fraud
in the execution, where the person is deceived into signing a document not
knowing that it is a will. An example would be obtaining a person’s autograph
on a blank sheet of paper, then, with the help of accomplices, placing will
language above it and witness signatures below to create what appears to be a
genuine will.
Mistake. Very rarely, a will can be
successfully contested on the basis of a mistake. Examples include: (a) the
testator leaves her estate to only one son, mistakenly believing that the other
is wealthy; (b) the testator mistakenly leaves out an intended clause; or (c)
the will mistakenly includes an unintended clause.
Ordinarily, a
finding of lack of testamentary capacity will invalidate the entire will, while
a finding of undue influence, fraud, or mistake might invalidate only those
provisions that relate to the specific problem.
Statutory Requirements for Wills
Most states, including those that have adopted the Uniform
Probate Code, recognize at least two types of wills, the witnessed will and the holographic
will.
Witnessed will. Although state laws
vary, a witnessed or attested will
must meet the following three requirements:
1. It must be in writing (handwritten, typed,
etc.).
2. The testator must sign the will in the
presence of two witnesses (three in a few states).
3. The two witnesses must sign their names to
the will, understanding that the instrument they sign is the testator’s will.
The main purpose of requiring witnesses is to prevent forgery and coercion of
the testator.
Beneficiaries
should not be witnesses to a will because that could imperil their right to
receive some or all their bequest. In many states, a bequest to a witness is
void, unless the witness is an heir. And in that case, the witness can take no
more than his or her intestate share. In some other states, a beneficiary can
witness the will, but if someone raises an undue influence challenge, the
“interested witness” may take more than the intestate share only if he or she
is able to rebut a statutory presumption that the bequest was procured by
duress, menace, fraud, or undue influence. Inability to rebut this presumption
might not totally invalidate the will, but it will probably invalidate some or
all the bequest to that witness.
Holographic will. If a written will
does not meet all the requirements for a witnessed will, in most states,
including those adopting the UPC, it can still be admitted to probate if it
meets the requirements for a holographic will. Typical state requirements for a
holographic will are:
1. Signature is in the testator’s handwriting.
2. All the “material provisions” of the will are
in the testator’s handwriting.
In the past,
courts often refused to admit to probate holographic documents unless it was
clear from reading just the handwritten portions that the document was the
decedent’s will. In determining what parts of the will must be in the
testator’s handwriting, some still follow the old rule, but many states now
allow a preprinted will form to be treated as a holographic will so long as
both the material provisions and the signature are in the decedent’s own
handwriting.[2] The material provisions are the
dispositive ones (who gets what), the identity of the executor, the nomination
of guardians, and the like.
Recently, the Uniform Probate Code added a
section that allows a court to accept as testamentary documents instruments
that do not meet the formal execution requirements of a witnessed will or the
handwriting requirements of a holographic will. However, the proponent of the
imperfectly executed will must establish by “clear and convincing evidence”
that the writing being offered was intended by the decedent to be his or her
will (or a codicil).[3] Clear and
convincing evidence is a higher standard of proof than the usual civil case
burden known as a preponderance of the evidence.
Contrasting witnessed and holographic
wills. There are two major differences
between the two sets of formal requirements: first, the witnessed will requires
the performance of certain activities by two witnesses. In contrast, the
holographic will may, but need not, be witnessed. Second, the holographic will
requires that all material provisions of the will be in the testator’s
handwriting. In contrast, the witnessed will requires that only the testator
and the witnesses’ signatures be in the person’s own hand, and even this may be
unnecessary when a proper authorization is arranged. A testator can execute a
will by directing another person to sign for him or her in the presence of the
witnesses.[4] In this case, it may be a good idea to
videotape the signing ceremony.
No Contest Clause
In the last few pages, we have described several technical
requirements for a valid will including testamentary capacity, absence of undue
influence, fraud, mistake, and certain specific execution requirements such as
signatures by witnesses and the testator. Anticipating that dissatisfied
persons may claim that one or more violations of these requirements have
occurred, as a pretext for obtaining more of the estate, testators may insert
in their will a “no contest” clause such as the one that follows:
I have purposely
made no provisions herein for any other person or persons, other than as set
forth in this will, and if any person contests this will, I revoke any share or
interest given such person, and said share or interest shall be disposed of as
though said person predeceased me without leaving issue.
This usually,
but not always, discourages will contests for several reasons. First, it will
discourage only beneficiaries named in the will, not disinherited persons who
stand to lose nothing by contesting. Second, beneficiaries may still wish to
contest if they expect to gain considerably more than they will lose. Finally,
in states that have adopted the UPC, such clauses are unenforceable if the
contestant had probable cause for instituting the proceedings.[5] Perhaps most testators would desire this
result anyway.
What situations tend to invite will
contests? The most common are where the testator chooses to disinherit family
members in favor of a friend, a charity, a spouse married shortly before death,
or where a testator treats children unequally. If the testator is very old or
is ailing physically or mentally, a contest is even more likely.
Will contests are infrequent, and
successful contests are very uncommon. One study showed that fewer than three
percent of wills offered for probate were challenged, and more than two-thirds
of those challenges were unsuccessful. However, will contests may become more
common for several reasons. As the general population continues to age, more
elderly people of means will acquire “friends” who offer to assist them in
their finances and work their way into the person’s estate plan. A high divorce
rate has increased the number of children of former marriages, a group that is
less likely to get along with the surviving spouse of a later marriage. When
any of these situations or factors apply to a particular client, attorneys
should take special precautions in drafting and executing the will.
The Simple Will
Wills can be quite lengthy and complex, but this section
focuses on a relatively simple will. A simple
will, as it is generally called, is a will prepared for a family having a
small, or even a modest estate, where death taxes are not a significant
concern. We will cover estate taxes in Chapter 5; and you will see that we are
in a period of transition. The amount that can pass tax-free (assuming the
decedent has not made significant lifetime gifts) is increasing, growing from
the pre-1998 figure of $600,000 to $3,500,000 in 2009. Complete repeal of the
estate tax takes place in 2010. However a “sunset” provision repeals the repeal
as of 2011. There is considerable agreement that Congress will not allow this
provision to take effect, so the shape of post-2010 tax law is uncertain. The
estate tax repeal may be made permanent or the tax-free amount may be set at a
high level and indexed for inflation.
The simple will
usually includes all the following: nominating an executor and, if there are
minor children, a guardian; a waiver of the probate bond; and, in most cases,
giving the testator’s property to the spouse, if alive, otherwise to the
children by right of representation.
Exhibit 3-1
presents a simple will that demonstrates the essential nature of this probate
property transfer document. The reader is encouraged to study it carefully so
that the analysis that follows is more readily understood.
WILL
OF
WILLARD
THOMAS SMITH
I, Willard Thomas Smith, a resident of
Mytown, Anystate, declare this to be my will. I revoke all prior Wills and
Codicils.
First: Family and Guardian I am married to Sue L. Smith, referred to in
this will as “my wife.” I have three children, all from this marriage, whose
names and birthdays are:
Kristi M. Smith June 27, 1987
Heather L. Smith April 19, 1989
Todd R. Smith May 11, 1991
Reference to “my
children” or to “my child,” shall include children born later and children
adopted by me. I have no deceased children.
If my wife does not survive me, and it is
necessary to appoint a guardian, I appoint Curtis J. Quint guardian of the
person and estate of each such minor child. If for any reason Curtis J. Quint
does not act as guardian, I appoint Maria S. Cruise as guardian of the person
and estate of each such minor child.
Second: Executor The executor shall serve as follows:
A.
Designation I appoint my wife as my executor. If for any
reason she does not so act, I appoint James A. Reliable to be my executor. If
for any reason neither my wife nor James A. Reliable acts as executor, I
appoint Third National Bank of Mytown to be my executor.
B.
Bond waiver No bond, surety, or other security shall be
required of my executor.
Third: Disposition of Property I make the following gifts of property:
A.
Tangible personal property If
my wife survives me by 30 days, I give her all my interest in our tangible
personal property. If my wife does not survive me by 30 days, I give my
tangible personal property to my issue, by right of representation, provided
they survive me for that period. My executor shall consider their personal
preferences in making the division. My executor has my permission to sell any
of that property and distribute the proceeds to equalize the shares. My
executor shall be 
discharged
for all tangible personal property so given to any minor child if the child, or
adult having the child’s custody, gives a written receipt to my executor.
B.
Residue If my wife survives me by 120 days, I give
her the residue of my estate. If my wife does not survive me by 120 days, I
give the residue to my issue, by right of representation, provided they survive
me for that period. If neither my wife nor any of my descendants survives me by
120 days, I give the residue of my estate according to Anystate’s laws of
descent and distribution, one half as if I had died with no will on the last
day of that 120-day period, and one half as if it were my wife’s estate and she
had died with no will on that last day.
C. Taxes
from residue All death taxes
imposed because of my death, as well as interest and penalties on those taxes,
whether on property passing under this will or otherwise, shall be paid by my
executor from the residue of my estate.
Fourth: Powers of Executor My executor shall have unrestricted powers,
without court order, to settle my estate as this will provides. In addition, my
executor shall have the following powers:
1. To make interim distributions of principal
and income to those entitled to it.
2. To sell, exchange, mortgage, pledge, lease or
assign any property belonging to my estate.
3. To continue operation of any business
belonging to my estate.
4. To invest and reinvest any surplus money.
I have signed my name to this instrument
on March 19, 2002, at Mytown, Anystate.
Willard Thomas Smith
Willard
Thomas Smith
Statement of Witnesses
We, the undersigned the witnesses, on March 19, 2002, sign our names to
this instrument, being first duly sworn, and do hereby declare to the undersigned
authority that the testator signs and executes this instrument as his last will
and that he signs it willingly (or willingly directs another to sign for him),
and that each of us, in the presence and hearing of the testator, hereby signs
this will as witness to the testator’s signing, and that to the best of our
knowledge the testator is eighteen years of age or older, of sound mind, and
under no constraint or undue influence.
John Meeks Jennifer Jarrett
1341 Park St., Little Town, Anystate 42 Short Rd., Little Town, Anystate
Analysis of the simple will. Let’s analyze the major provisions of this
will, section by section.
Will
of Willard Thomas Smith. In this introductory paragraph, the testator
“declares” the document to be his will, satisfying the legal requirement that
there be evidence of testamentary intent.
A codicil is a separate written document
that amends or revokes a will. It is executed if the testator wishes to make
changes or additions to his or her will. It must meet all the legal
requirements of a will, including subscription by witnesses, although in states
that recognize holographic wills, a holographic codicil even to a witnessed
will is acceptable if the codicil meets that state’s requirements for a
holographic will.
One of the more
common methods of revoking a prior will is by executing a later will that
declares such revocation, as is done in the Smith will. Revocation by
“cancellation” with a “subsequent instrument,” as it is termed, can also be
undertaken in any other signed, witnessed statement. A will can also be revoked
by a physical act, such as burning, tearing, canceling, or otherwise destroying
it, when such is done by the testator with an intent to revoke.[6]
Revoking all prior wills and codicils
eliminates the danger that provisions in prior wills that are inconsistent with
the present will may cause confusion. Without a revocation clause, needless
litigation might arise over whether the provisions in two or more wills are
inconsistent. For example, in one state supreme court case, a decedent-testator
had written two “last” wills within three weeks. The first simply left “a tract
of land” to a friend. The second contained no revocation clause and left “all
my effects” to siblings Y and Z. The court permitted a trial to determine
whether the first will should be construed along with the second, reasoning
that they were not necessarily inconsistent because the testator could have
used the word “effects” to mean only personal property.[7] If the
testator’s intent was to leave everything to Y and Z, inclusion of a revocation
clause would have assured this result. If the intent was to preserve the gift
of the land to the friend, then that should have been clearly stated in the
second will.
First:
Family and guardian. Naming all members of the immediate family
assists the personal representative in finding relatives and locating assets.
Including after born children in the will prevents
a child born after the execution of the will from inheriting under the laws of
intestate succession, a consequence which would probably conflict with the
testator’s intent.
A child who is
still a minor when both parents are dead will have a guardian of the person and of the estate appointed by the probate
court. A guardian of the person is responsible for the minor child’s care,
custody, control, and education, while a guardian of the child’s estate is
responsible for managing the minor child’s property. A testator’s nomination
carries great weight and is usually
followed; however, the probate judge does have the power to
appoint someone else if there is good cause for not following the nomination.
Nominating an alternate guardian increases the likelihood that the testator’s
preferences will be followed.
Second:
Executor. Similar to the nomination of a guardian, the nomination of an
executor and an alternate executor is helpful to the probate court in its
selection process. The court will follow the recommendation of the testator
unless there is good cause to do otherwise.
Unless the bond
is waived in the will, the executor is required to post a fiduciary bond. A bonding company, for a fee, insures the estate
assets against losses caused by the personal representative’s breach of
fiduciary obligations, whether the breach is the result of negligence or
willful misconduct. The will can waive the bond requirement. The testator may
consider a bond unnecessary because it results in additional expense to the
estate, and/or because the executor is a highly trusted member of the
testator’s family, such as the surviving spouse, and/or is also one of the
major beneficiaries of the estate. Ordinarily, the bond amount will be set by
the court to be equal to the total value of the personal probate property plus
one year’s estimated income from all the probate property. The idea here is
that the personal representative could run off with everything but the real
property.
Third:
Disposition of property. This
simple will essentially leaves all property to the testator’s spouse, if
surviving, otherwise to the children. The contingent interest of the children
is sometimes referred to as a “gift-over” to the children. The will
distinguishes the tangible personal property from the residue, which consists
of all other probate assets. Thus, the spouse must survive by 30 days to take
tangible personal property and 120 days to take the residue. If the spouse does
not survive the requisite time period, the property passes to the children who
do so survive.
Inclusion of a
survival requirement, such as 30 days or 120 days, reduces the likelihood that
the death of both spouses in a common accident will result in subjecting some
of the family property to two successive probates. This survival clause, as it is called, helps in situations not covered
by the Uniform Simultaneous Death Act (USDA).
Enacted by every
state, the USDA provides that when transfer of title to property depends on the
order of deaths, and when no sufficient evidence exists that two people died
other than simultaneously, the property of each is disposed of as if each had
survived the other. Thus, in the case of a childless married couple, the
husband’s estate would pass to his blood relatives and the wife’s estate would
pass to her blood relatives. This statute is of limited value, however, because
it does not avoid double probate when the order of deaths can in fact be
established. In some states, if it can be established that one spouse survived
the other, even only by seconds, then the USDA will not apply and, absent a
survival clause, there will be a double probate of the property owned by the
first spouse to die. Perhaps worse, all the property may ultimately pass to
that spouse’s in-laws, rather than the surviving relatives. Some states,
including California, have legislated safeguards against inheritance by in-laws
by requiring that the portion of the decedent’s estate attributable to the
predeceased spouse pass, in some circumstances, to the predeceased spouse’s
children, parents, or other kin.[8] The Uniform Probate Code requires a
beneficiary of an estate to outlive the decedent by 120 hours or be deemed to
have predeceased the decedent. This rule is not applied if it would cause the
decedent’s property to escheat (revert) to the state.
With regard to insurance on the life of a
decedent, the USDA states that, in the event of an apparent simultaneous death
of the insured and the beneficiary, the policy proceeds are to be distributed
as if the insured survived the beneficiary. Thus, the proceeds will be paid to
the contingent beneficiary, and if none, then to the owner’s probate estate.
Section B of Article Three, covering the
“residue,” is called the residuary clause.
Failure to include it in a will can result in partial intestacy. In a recent
case, the attorney who had drafted the decedent’s will admitted that he
mistakenly omitted the residuary clause, but his notes showed that the decedent
wanted the residue to go to a specific friend. The court would not allow
admission of this evidence, ruling that extrinsic evidence is admissible to
explain poorly drafted parts of a will, but cannot be used to put in parts that
are missing.[9]
Disposing of estate property by
differentiating the tangible personal property from the residue can speed up
probate distribution and can often save income taxes. In the chapter on
fiduciary income taxes, the concept of distributable net income, or DNI, is
discussed. A specific bequest of
property, such as when the testator specifies a bequest of the tangible
personal property, prevents the distribution from being labeled DNI. This
generates less taxable income to the distributees (often the spouse and/or
children), and correspondingly more taxable income to the estate, which is
(hopefully) in a lower rate bracket.
Instead of “tangible personal property,”
some wills ill-advisedly use the term “personal effects,” which really means
“tangible personal property, worn or carried about the person or having some
intimate relation with the person.” Since automobiles and some other property
are not considered “personal effects,” the broader term tangible personal property is preferred. Early distribution of this
property also allows the executor to avoid the cost and trouble of storing it.
Distribution by right of representation, or per
stirpes as it is also called, is a method of allocating a bequest of the
decedent’s property such that it follows the natural line of descent (e.g., the
children of a predeceased child share that child’s portion of the estate.)
The laws of intestate succession, also
known as “laws of descent and distribution,” vary somewhat from state to state.
They spell out the priority of succession rights of the decedent’s spouse and
kin in the event of intestacy. In the event that his wife and all his
descendants fail to survive him by 120 days, the testator has generously chosen
to divide his property in halves, with one half going by intestate succession
to his relatives and the other half going by intestate succession to his wife’s
relatives.
Fourth:
Powers of executor. Granting explicit powers to the executor can
eliminate the need to secure permission of the probate court to undertake
certain administrative actions. Ordinarily, testators would like their
executors to act without undue delay.
Signature
clause and the statement of witnesses. Every state imposes formal
requirements regarding the signing of the will by the testator and the role of
the witnesses. The paragraph above the witnesses’ signatures increases the
likelihood of compliance with these formal requirements by explicitly stating
them and having the witnesses, by their signatures, acknowledge that such were
carried out. The last sentence above the signatures of the witnesses offers
some additional evidence of the testator’s capacity to execute a will. The
Statement of Witnesses is also referred to as the attestation clause. When a will is signed and witnessed in the
proper manner, such that it is a valid will, it is said to be executed.
Other aspects of the simple will.
Simple wills are most commonly drafted by attorneys for clients with modest
estates where death taxes are not a concern. For a married couple, a simple
will is usually prepared for each spouse. In most cases, the dispositive
clauses are almost identical. Thus, the husband’s will leaves all to his wife,
if she survives, otherwise to their children. And the wife’s will leaves all to
her husband, if he survives, otherwise to their children. Such simple wills are
commonly called reciprocal wills, mirror wills, or mutual wills.
Occasionally,
clients will want contractual wills,
ones that cannot be revised once one of the parties (usually a spouse) dies.
Sometimes these are done in the form of a single will for two people, called a joint will, although a joint will need
not be contractual. Contractual wills are rare because most clients want the
flexibility of being able to change an estate plan after one spouse dies. Joint
wills should be avoided unless the clients really want a contractual will,
because even if the clients did not intend the joint will to be irrevocable
once one of the testators dies, a court may rule that this was the intent
because there can be little other reason to create one will for two people.
Wills that are
more complex are less likely to be reciprocal in content. Typically, they are
prepared by attorneys specializing in estate planning to reflect the inherently
different preferences and different financial and tax circumstances of the
spouses. This text will highlight many of these differences in later chapters.
Where should the
original copy of the will be kept? The client’s safe deposit box makes good
sense in those states (e.g., California) that do not seal boxes at the owner’s
death. In states where safe deposit boxes are sealed at the owner’s death,
access to the will is delayed until a state official can join the prospective
executor in inventorying the contents of the box so as to ensure that the
executor accounts for any jewelry, bearer bonds, and the like that might be
there. Some attorneys recommend their own safe. Some people might view this as
self-serving, since the executor will have to come to the attorney’s office to
take charge of the will, thus giving the attorney a good chance of serving as
the probate attorney. However, since the testator selected that attorney to
draft the estate plan, it would seem reasonable to select that attorney to
handle the probate. Some attorneys simply recommend a secure, handy place in
the client’s home.
Next, we examine
the trust, the other major planning document of transfer.
THE TRUST
The principal parties to a trust are the trustor, the
trustee, and the beneficiary. As a legal arrangement, a trust is created by the
trustor and divides and transfers interests in property between two or more
people. Any interests or control over the trust not given to the beneficiaries
are either retained by the trustor, granted to the trustee, or held by both.
A trust can take
effect during the lifetime of the trustor, or it can take effect at the
trustor’s death. The former is called a living
(or inter vivos) trust, while the latter is called a testamentary trust - a complex will that is also called a
“trust-will.” The testamentary trust document is covered later in the chapter.
At any given
moment, a trust is either revocable and amendable, in which case the trustor is
capable of voiding (canceling) or amending it, or it is irrevocable, that is,
not voidable or amendable. A living trust usually contains specific language
stating whether it is revocable or irrevocable. A revocable living trust
usually, but not always, becomes irrevocable at the death of the trustor(s).
Like the contents of most wills, the provisions of a testamentary trust can be
amended or revoked before the testator’s death by codicil, revocation, or
destruction of the document. At the testator’s death, a testamentary trust
takes effect and becomes irrevocable since the only person capable of amending
or revoking it, the testator, is, of course, permanently unavailable.
A trust usually
contains two different legal types of property, principal and income. The principal of a trust is its invested
wealth. Its size will fluctuate with changes in the market value, by additions
(income or additional property), by charges (expenses or losses), and by distributions
from it. In contrast with trust principal, the income of a trust is the return in money or property derived from
use of the trust principal. Examples of income include cash dividends, rent,
and interest. Trust income also has charges against it, most of which reflect
expenses incurred in managing the trust property (e.g., insurance premiums and
some portion of the trustee’s fee). Any trust income not distributed to
beneficiaries is said to be accumulated in the trust and is generally accounted
for as retained income, not principal, unless the trust agreement requires that
accumulated income be added to principal.
The accounting
distinction between principal and income is particularly important, because
most trusts contain provisions that bestow rights to principal and income to
different beneficiaries. In the chapter on fiduciary income taxes, we will see
that the distinction between principal and income will influence trust income
taxation.
The
beneficiaries of an irrevocable trust are usually either income beneficiaries (i.e., those having an interest in the income)
or principal beneficiaries (for
example, a remainderman who stands to receive principal outright when the trust
terminates). These two types of beneficiaries may have conflicting or “adverse”
interests, because the increased distributions to one will generally decrease
the distributions to the other. For example, high-yield/low-growth stock would
tend to benefit the income beneficiaries more than the remaindermen whereas
low-yield/high-growth stock would favor the remaindermen more than the income
beneficiaries.
The following
material describes a living trust and a testamentary trust. Keep in mind that
individual trusts vary greatly, so it is a stretch to call any trust used as an
example here typical. These examples are merely to illustrate the basic form of
each document. There are other ways of classifying trusts, especially in
connection with tax planning. The chapters in Part 3 introduce several
tax-saving trusts, including the bypass trust, the Crummey trust, and the QTIP
trust.
Living Trust Instrument
A living trust is created by a document of agreement
between the trustor (or settlor) and the trustee. Before we examine the actual
instrument, let’s compare and contrast the characteristics of a living trust
with a will.
Similarities. The will and the living
trust instrument are similar in three important ways. First, both serve as the
guide to the disposition of property at death. Second, both have a fiduciary
(the executor or the trustee) who is responsible for managing property for a
period of time until the transfers can be completed. Third, both instruments
are generally amendable and revocable, at least until the person creating the
instrument dies. The will can nearly always be amended by a codicil, or revoked
by its destruction or by execution of a later will that explicitly revokes
earlier ones. One exception, of course, is the contractual will, which becomes irrevocable after the death or
incapacity of the first co-testator. The living trust is either revocable or
irrevocable. In most states, a trust must state that it is revocable, otherwise
it becomes irrevocable upon execution. In the other states, the opposite rule
is in effect, such that a trust is revocable unless stated to be irrevocable.
Differences. The will and the living
trust instrument are different in three important ways. First, they dispose of
a totally different set of property. A living trust instrument disposes of
property owned by the trustee in trust for the trustor (decedent), while a will
disposes of probate property owned by the decedent at death. Thus, with regard
to property transfers, the living trust instrument and the will are mutually
exclusive; property owned by the trustee is not probate property, while probate
property is owned by the decedent, not the trustee. Of course, the decedent’s
will can transfer property, by way of the probate process, to the trustee of
his or her living trust, or even to the trustee of a trust he or she did not create,
such as one created by one’s spouse. A will that transfers property to a
trustee is called a pour-over will,
because it scoops up property and “pours” it into an existing trust.
Second, with
regard to choosing a fiduciary, a living trust instrument appoints a trustee whereas a will nominates an executor. A testamentary trust must nominate both an
executor and a trustee. Since the trustor of a living trust is alive when the
trustee is appointed, the trustor has control over the appointment. The trust instrument
is a legal contract between the trustor and the trustee. On the other hand, the
probate judge appoints the executor of a will after the testator’s death. The
judge may appoint someone other than the nominated executor for any number of
reasons, including the nominee’s inability to serve due to death, disability,
or incompetence.
Third, while the
formal execution requirements for writing a will are quite strict, the
requirements for properly executing a trust instrument are simple to meet. In
most cases, the trust document is simply dated and signed by the trustor and
the trustee. Witnesses are not required. However some attorneys have the
trustor’s signature notarized to assure others of its validity, especially
those who might have to rely on the document at a time when the trustor is
incapacitated or deceased. Although the formalities surrounding the execution
of a trust document are simpler than those for a will, the mental capacity
necessary is set at a higher standard. The settlor must have contractual
capacity. Given the nature of the trust document, this would be, in addition to
testamentary capacity, the ability to understand and enter into a bilateral
contractual agreement. In most states, one contesting a settlor’s (or a
testator’s) capacity has the burden of proving the lack of capacity by “clear
and convincing” evidence. This is a more difficult (i.e., higher) standard than
the typical “preponderance” of evidence burden generally placed on the
plaintiff in a civil case.
Exhibit 3-2
presents a fairly simple living trust. It is not designed to break into several
irrevocable trusts at the trustor’s death as some do in order to save estate
taxes. We will discuss those later.
JOHN C. JONES
Revocable
Living Trust
Dated March 19, 2002
TRUST AGREEMENT
made March 19, 2002, between John C. Jones, as trustor, resident of Common
County, Anystate, and John C. Jones, resident of Common County, Anystate, as
trustee.
1. Trust property. The trustor has set aside and holds in trust the property described
on Schedule One, attached to this instrument. The trustee agrees to hold such
property and any later accepted property, in trust, under the terms and
conditions provided herein.
2. Successor trustee. If John C. Jones for any reason ceases to
act as trustee, his wife, Sarah E. Jones, shall serve as trustee. If Sarah E.
Jones is unable or for any reason ceases to act as trustee, then First National
Bank of Anytown shall serve as trustee.
3. Power to amend or revoke. The trustor reserves the right at any time
to amend or revoke this trust, in whole or in part, by an instrument in writing
signed by him and delivered during his lifetime to the trustee.
4. Operation of trust during trustor’s lifetime. During the trustor’s lifetime, the trustee
shall administer and distribute the trust as follows:
a. Trust
income. The trustee shall pay the
net income to the trustor at convenient intervals but at least
quarter-annually.
b. Trust
principal. The trustee shall pay to
the trustor from time to time such amounts of the principal of this trust as
the trustor shall direct in writing or as the trustee deems advisable for the
trustor’s support and comfort.
5. Operation of trust after trustor’s death. On the death of the trustor, the trust
estate shall be held, administered, and distributed as follows:
a. Wife
survives by four months. If the
trustor’s wife survives trustor by four months, the trustee shall distribute
the entire trust estate to the trustee of her revocable trust, dated the same
date as this trust, to be held and administered according to its terms. If said
trust is no longer in existence, then distribution shall be to trustor’s wife,
free of trust.
b. Wife
does not survive by four months. If
the trustor’s wife does not survive the trustor by four months and if no
then-living child of the trustor is under age twenty-one, then the trustee
shall divide the trust into as many equal shares as there are children of the
trustor’s then living and children of the trustor’s then deceased with descendants
then living. Each share set aside for a child then deceased with descendants
then living shall be further divided into shares for such descendants, by right
of representation. The trust estate shall be held, administered, and
distributed in the manner described in subsections 5(b)(2)(a) and (b), below.
If neither the trustor’s wife nor any of
the trustor’s descendants survive the trustor by four months, the trustee shall
distribute the entire trust estate according to Anystate’s laws of descent and distribution,
one half as if the trustor had died with no will on the last day of the
four-month period and one half as if it were the trustor’s wife’s estate and
she had died with no will on the last day. If the trustor’s wife does not
survive the
trustor by
four months and if any then-living child of the trustor is under age
twenty-one, then the trust estate shall be held, administered, and distributed
as follows:
(1) Any child under age twenty-one.
So long as any of the trustor’s children are living who are under
twenty-one, the trustee shall pay to or apply for the benefit of all the
trustor’s children as much of the net income and principal as the trustee in
the trustee’s discretion deems necessary for their proper support, health, and
education, after taking into consideration, to the extent that the trustee
considers advisable, the value of the trust assets, the relative needs, both
present and future, of each of the beneficiaries, and their other income and
resources made known to the trustee and reasonably available to meet
beneficiary needs. The trustee may make distributions under this provision that
benefit one or more beneficiaries to the exclusion of others. Any net income
not distributed shall be accumulated and added to principal.
(2) Youngest child reaches age twenty-one. When the youngest of the
trustor’s then-living children reaches age twenty-one, the trustee shall divide
the trust into as many equal shares as there are children of the trustor’s then
living and deceased children who left issue. Each share set aside for the issue
of a deceased child shall be further divided into shares, by right of
representation, for such descendants. Each such share shall be distributed, or
retained in trust, as hereafter provided.
(a) Each
share set aside for a descendant shall be distributed to that descendant free
of trust when he or she reaches age twenty-one.
(b) Each
share set aside for a descendant who has not then reached age twenty-one shall
be retained in trust. The trustee shall pay to or for the benefit of that
descendant as much of the income and principal of the trust as the trustee, in
the trustee’s discretion, considers appropriate for that descendant’s support,
health, and education. When that descendant reaches age twenty-one, the
descendant’s share shall be distributed to that descendant, free of trust. If
that descendant dies before receiving distribution of that descendant’s entire
share, the undistributed balance of that descendant’s share shall be
distributed, free of trust, to that descendant’s then-living descendants, by
right of representation, or if there are none, to the trustor’s then-living
descendants, by right of representation. The share of a descendant for whom
there exists a trust created by this instrument, shall augment that
descendant’s trust.
6.
Restriction against assignment, etc.
No interest in the principal or income of this trust shall be
anticipated, assigned, encumbered, or subject to any creditor’s claim or to
legal process before its actual receipt by the beneficiary.
7.
Perpetuities saving. Any trust
created by this will that has not terminated sooner shall terminate twenty-one
years after the death of the last survivor of the class composed of my wife and
those of my descendants living at my death.
8. Powers of trustee. To carry out the purposes of this trust, the
trustee is vested with the following powers with respect to the trust estate
and any part of it, in addition to those powers now or hereafter conferred by
law:
a. To continue to hold any property, including
shares of the trustee’s own stock, and to operate at the risk of the trust
estate any business that the trustee receives or acquires under the trust as
long as the trustee deems advisable.
b. To manage, control, grant options on, sell
(for cash or on deferred payments), convey, exchange, partition, divide,
improve, and repair trust property.
c. To lease trust property for terms within or
beyond the term of the trust and for any purpose, including exploration for and
removal of gas, oil, and other minerals and to enter into community oil leases,
pooling, and unitization agreements.
d. To borrow money and to encumber or
hypothecate trust property by mortgage, deed of trust, pledge, or otherwise.
e. To invest and reinvest the trust estate in
every kind of property, real, personal, or mixed, and every kind of investment,
specifically including, but not by way of limitation, corporate obligations of
every kind, stocks (preferred or common), shares of investment trusts, investment
companies and mutual funds, and mortgage participations, which persons of
prudence, discretion, and intelligence acquire for their own account, and any
common trust fund administered by the trustee.
f. In any case in which the trustee is
required, pursuant to the provisions of the trust, to divide any trust property
into parts or shares for the purpose of distribution, or otherwise, the trustee
is authorized, in the trustee’s absolute discretion, to make the division and
distribution partly in kind and partly in money, and for this purpose to make
such sales of the trust property as the trustee may deem necessary on such
terms and conditions as the trustee shall see fit.
IN WITNESS THEREOF this instrument has
been executed as of the date set forth on the first page of this instrument.
John C. Jones John C. Jones
John C. Jones,
Trustor John
C. Jones, Trustee
[Notarization of the
signatures would appear here]
Analysis of the living trust instrument.
Let’s examine the major provisions of this living trust instrument section by
section.
Trust agreement. A trust is, in effect,
a contract or agreement between two parties, the trustor and the trustee. Both
sides agree to perform certain tasks: among other things, the trustor agrees to
deliver property described in Schedule One (not shown) to the trustee, and the
trustee agrees to hold, administer, and distribute the trust property in
keeping with the terms of the trust.
In this living
trust instrument, the trustor names himself to be initial trustee and names
alternate successor trustees to take over when he resigns, becomes incapable of
performing because of incapacity, or death. In other words, he might want to
travel without worrying about managing the trust property or he might become
too ill to manage it.
1.
Trust property. The instrument specifies that additional assets may be
put in trust in the future, even after the trustor’s death. For example, a
trustor’s will can be directed to “pour over” probate property into a trust.
2.
Successor trustee. Since the trust instrument states the trustee’s name
in the opening paragraph, this section needs only name successor trustees. It
is usual to name one or more of the remaindermen, if they are adults, as
successors, since the remaindermen have a vested interest in managing and
transferring the property efficiently. Sometimes the children are named as
successor trustees, with the requirement that they have reached a certain age
(e.g., twenty-five), in order to serve. Naming a bank, or other corporate
entity, as a successor trustee virtually ensures that an experienced trustee
will be available to serve for the duration of the trust. Some corporate
fiduciaries will not assume the position of trustee unless the corpus is some
minimum value. Where a corporate trustee is being considered, a meeting with
the trust officers should be arranged to decrease the likelihood that the
position will be refused later.
3.
Power to amend or revoke. This trust can be amended or revoked by a
written document signed by the trustor and delivered to the trustee. An
amendment is similar to a codicil to a will but without the strict formal
execution requirements.
4.
Operation of trust during trustor’s lifetime. During the trustor’s
lifetime, the trustee is required to pay to the trustor all income at least
quarterly and any principal as requested. The reader will notice the wording
assumes the trustor and the trustee are different parties. However, as
mentioned above, most living trusts name the trustor as the initial trustee.
Nevertheless, this paragraph is used in anticipation that, at some point, a
successor trustee will take over the management of the trust.
5.
Operation of trust after trustor’s death. This section is substantially
longer than the Disposition of Property section in the simple will. It provides
for several alternative outcomes depending on who survives. First, the trust
terminates if the trustor’s spouse survives the trustor by four months, with
the result that all trust property will pass to her revocable trust or, if it
is no longer in existence, then outright to her.
Second, if the
trustor’s spouse does not survive by four months and all the trustor’s children
are over age twenty-one, the trust will terminate and distribute all assets
free of trust to the children. However, if one or more of the trustor’s living
children are younger than twenty-one, the trust continues as one trust. The
trustee is instructed to collectively use trust principal and income to provide
for all the children’s support, education, and other reasonable needs. Thus,
the trustee has a limited power of appointment over the entire trust income and
principal, with all living descendants named as permissible appointees. Then,
when the youngest child reaches twenty-one, the trust is divided into equal
shares, one for each child then living, and one for each deceased child for
whom there are living descendants. The trust directs distribution to the
younger generations by right of representation, also called “traditional per
stirpes,” a concept more fully explained in a later chapter. Each share is then
distributed outright to each descendant when he or she reaches age twenty-one.
Thus, at the time the corpus is split, each child and any other descendant beneficiary
who is at least age twenty-one will receive his or her share.
Third, if the
trustor’s spouse fails to survive the trustor by four months and no living
child is under age twenty-one, the trust may or may not terminate, depending on
whether there are underage descendants of deceased children. In any event,
however, the trust estate is immediately divided into shares, and each child
immediately receives his or her share. The balance of the trust corpus (held
for these underage descendants of deceased children) will be administered in a
manner (described below) quite similar to the way it is administered for a
living child under age twenty-one. As each of these descendants reaches age
twenty-one, he or she will receive an outright distribution of his or her
share. Accordingly, the trust will terminate when the youngest living
descendant of deceased children reaches age twenty-one.
Finally, if the
trustor is survived by neither a spouse nor descendants, the trust terminates
and the trust property passes by intestate succession, with one half to the
trustor’s relatives and the other half to the trustor’s spouse’s relatives. The
laws of intestate succession are covered in the next chapter.
The above
disposition, using a trustee, has much to recommend it over the will’s
provisions making outright gifts to the minor children, which requires a
court-appointed guardian.
6. Restriction against assignment. This
is an example of a spendthrift clause.
Without it, the laws of many states would allow trust beneficiaries to transfer
and encumber their interests in the trust property, and would enable the
beneficiaries’ creditors to seize trust assets to satisfy their claims. For
example, beneficiaries may not borrow money secured by their share of trust
property, sell a future interest in it, or devise it. A spendthrift clause
restricts such transfers. However, it only protects trust property while held
by the trustee, not after it has been transferred outright to a beneficiary.
7. Perpetuities saving. This clause is
included to prevent a contingent gift from being ruled invalid because it
violates a law found in almost all states that requires interests to vest
within some reasonable time after the transfer. This law is called the rule
against perpetuities.
8. Powers of trustee. Since a trustee is
likely to manage trust property for a considerably longer period than an
executor is likely to manage an estate, the powers granted to the trustee are
usually stated in more detail than those granted in a will to an executor. In
addition to these powers, both the executor and trustee automatically have
other implicit powers derived from statutory law and from case law, unless the
document specifically prohibits such powers. For example, trustees have the
power to defend against claims brought against the trust property, whether that
power is specifically granted in the document.
This living
trust is uncomplicated primarily because it does not attempt to save estate
taxes. If the other spouse survives the trustor spouse by four months, all
corpus will pass to the surviving spouse’s revocable trust or outright to her.
Like the simple will, it is created for families with modest estates, for whom
death tax planning is not a significant concern. We will introduce a more
complicated tax-saving living trust in the two chapters that deal with estate
plans for the wealthy, where estate taxes are a concern.
THE TESTAMENTARY TRUST
The testamentary trust, or trust-will, is the third
principal document of property disposition commonly prepared by attorneys in
the estate planning process. In essence, a testamentary trust is actually one
type of will; it serves as the guiding document for the distribution of the
testator-trustor’s probate property at death. In addition, it disposes of some,
or all, of the probate property to the trustee of a trust that is newly created
according to trust terms that are set forth as part of the will. This trust
takes effect after the testator’s death at the end of the probate process. The
actual creation of the trust, and the funding mechanism, is the order for
distribution. The order names (appoints) the trustee, sets forth all the terms
of the trust (generally quoting verbatim from the testamentary trust document),
and orders the executor to distribute the estate to the trustee. The trustee
uses the order as the governing document when dealing with third parties, such
as banks, brokers, and title companies, rather than the original trust-will.
Recording a certified copy of the order in those counties where real property
is located serves to transfer the property from the estate to the trustee.
As a will, the
testamentary trust must conform to all legal requirements for the execution of
a will. It therefore contains all essential provisions found in any will, such
as nomination of a guardian of the person and estate of the testator’s minor
children, nomination of executors, and a section for the attestation by
witnesses. It may also have provisions that make outright gifts of certain
property (e.g., the tangible personal property may be given to the spouse or
children free of trust).
In addition to
containing all provisions customarily found in other wills, the testamentary
trust, like the living trust, must include other unique clauses that relate to
the trust itself. Thus, it will include provisions for distributing probate
property into the trust, for naming one or more trustees, for stating who will
be the trust beneficiaries, for specifying how much income and principal they
will receive and when they will receive it, and for describing the trustee’s
duties and powers in connection with managing the trust property. Of course,
all but the first clause just mentioned are also included in a living trust.
It should be
noted that being a will, the testamentary trust is not an “agreement” between
testator and future trustee. In fact, the potential trustee may not even be
aware that he or she will one day be asked to perform this task, and may not
even be born when the testamentary trust was signed. Before the court order of
distribution, the nominated trustee will have to file with the court a consent
to serve as trustee. Exhibit 3-3 presents a relatively uncomplicated
testamentary trust.
WILL
OF
WILLARD
THOMAS SMITH
I, Willard Thomas Smith, a resident of
Mytown, Anystate, declare this to be my will. I revoke all prior Wills and
Codicils.
First: Family and Guardian I am married to Sue L. Smith, referred to in
this will as “my wife.” I have three children, all from this marriage, whose
names and birthdays are:
Kristi M. Smith June 27, 1987
Heather L. Smith April 19, 1989
Todd R. Smith May 11, 1991
Reference to “my
children” or to “my child,” shall include children born later and children
adopted by me. I have no deceased children.
If my wife does not survive me, and it is
necessary to appoint a guardian, I nominate Curtis J. Quint guardian of the
person and estate of each such minor child. If for any reason Curtis J. Quint
does not act as guardian, I nominate Maria S. Cruise
as guardian of
the person and estate.
Second: Selection of Fiduciaries I nominate the
following fiduciaries:
A.
Designation of Executor I nominate my wife as my executor. If for
any reason she does not so act, I nominate James A. Reliable to be my executor.
If for any reason neither my wife nor James A. Reliable acts as executor, I
nominate Third National
Bank of Mytown
to be my executor.
B.
Designation of trustee I nominate such of my children as are over
age twenty-five as co-trustees. If my children are unable to serve as trustees,
then I nominate James A. Reliable as the trustee of all trusts provided for under this will. If for any reason
neither my children nor James A. Reliable are available to serve as trustee, I
nominate Third National Bank of Mytown as trustee.
C.
Bond waiver No bond, surety, or other security shall be
required of my executor or of my trustee.
Third: Disposition of Property I make the following provisions for my
probate property:
A.
Tangible personal property If my wife survives me by 30 days, I give
her all my interest in any tangible personal property. If my wife does not
survive me by 30 days, I give my tangible personal property in equal shares to
those of my children who survive me by 30 days. My executor shall consider
their personal preferences in making that division. If my children are still
minors, my executor has my permission to sell any of that property and
distribute the proceeds to equalize the shares. My executor shall be discharged
for all tangible personal property so given to any minor child if the child or
adult having the child’s custody gives a written receipt to my executor.
B.
Residue If my wife survives me by four months, I
give her the residue of my estate. If my wife does not survive me by four
months and all my living children are then over age twenty-one, I give the
residue in equal shares: one to each child who survived me by four months, and
one share for each deceased child whose issue is then living. If any issue of a
deceased child entitled to a share is under age twenty-one, his or her share
shall be administered as set forth at subparagraph two of this Third Article.
If my wife does not survive me and if any
child of mine is under age twenty-one, then the residue of my estate shall not vest
in the children as provided above; rather, such property shall be distributed
in trust to the trustee named above, to be held, administered, and distributed
as follows:
1. Any child under age twenty-one So long as a child is under age twenty-one,
the trustee shall pay to or apply for the benefit of my children, as much of
the net 
income and
principal as the trustee in the trustee’s discretion deems appropriate for
their proper support, health, and education, after taking into consideration,
to the extent that the trustee considers it advisable, the value of the trust
assets, the relative needs, both present and future, of each of the
beneficiaries, and their other income and resources made known to the trustee
and reasonably available to meet beneficiary needs. The trustee may make
distributions under this provision that benefit one or more beneficiaries to
the exclusion of others. Any net income not distributed shall be accumulated
and added to principal.
2. Youngest child reaches age twenty-one When the youngest child reaches age
twenty-one, the trustee shall divide the trust into as many equal shares as
there are children of mine then living and children of mine then deceased with
descendants then living. Each share set aside for a child of mine then deceased
with descendants then living shall be further divided into shares for such
descendants, by right of representation. Each such share shall be distributed,
or retained in trust, as hereafter provided.
a. Each share set aside for a child, or for the descendant of a
deceased child who has reached age twenty-one, shall be distributed free of
trust.
b. Each share set aside for a descendant who has not reached age
twenty-one shall be retained in trust. The trustee shall pay to, or for the
benefit of, that descendant as much of the income and principal of the trust as
the trustee, in the trustee’s discretion, considers appropriate for that
descendant’s support, health, and education. When the descendant reaches age
twenty-one, that descendant’s entire share shall be distributed to that
descendant, free of trust. If that descendant dies before receiving
distribution of that descendant’s entire share, the undistributed balance of
that descendant’s entire share shall be distributed to that descendant’s
then-living descendants, by right of representation, or if there are none, to
my then-living issue, by right of representation. In the latter event, the
share of a descendant for whom there exists a trust created by this instrument
shall augment that descendant’s trust.
C.
Taxes from residue All death taxes imposed because of my death
and interest and penalties on those taxes, whether on property passing under
this will or otherwise, shall be paid by my executor from the residue of my
estate.
D. Restriction against assignment, etc. No interest in the principal or income of
this trust shall be anticipated, assigned, encumbered, or subject to any
creditor’s claim or to legal process before its actual receipt by the
beneficiary.
E. If all beneficiaries die before full
distribution If neither my wife nor
any of my descendants survives me by four months, I give the residue of my
estate according to Anystate’s laws of descent and distribution, one half as if
I had died with no will on the 
last day
of that four-month period, and one half as if it were my wife’s estate and she
had died with no will on that last day.
F. Perpetuities saving Any trust created by this will that has not
terminated sooner, shall terminate twenty-one years after the death of the last
survivor of the class composed of my wife and those of my issue living at my
death.
Fourth: Powers of Executor My executor shall have unrestricted powers,
without court order, to settle my estate as this will provides. In addition, my
executor shall have all powers my executor thinks necessary or desirable to
administer my estate, including the following:
A. To
make distributions of principal and income on an interim basis to those
entitled to it.
B. To
sell, exchange, mortgage, pledge, lease, or assign any property belonging to my
estate.
C. To
continue operation of any business belonging to my estate.
D. To
invest and reinvest any surplus money.
Fifth: Powers of Trustee
To carry out the purposes of any trust created under Article Three, and
subject to any limitations stated elsewhere in this will, the trustee is vested
with the following powers with respect to the trust estate and any part of it,
in addition to those powers now or hereafter conferred by law:
A. To
continue to hold any property, including shares of the trustee’s own stock, and
to operate at the risk of the trust estate any business that the trustee
receives or acquires under the trust as long as the trustee deems advisable.
B. To
manage, control, grant options on, sell (for cash or on deferred payments),
convey, exchange, partition, divide, improve, and repair trust property.
C. To
lease trust property for terms within or beyond the term of the trust and for
any purpose, including exploration for and removal of gas, oil, and other
minerals and to enter into community oil leases, pooling, and unitization
agreements.
D. To
borrow money and to encumber or hypothecate trust property by mortgage, deed of
trust, pledge, or otherwise.
E. To
invest and reinvest the trust estate in every kind of property, real, personal,
or mixed, and every kind of investment, specifically including, but not by way
of limitation, corporate obligations of every kind, stocks (preferred or
common), shares of investment trusts, investment companies and mutual funds,
and mortgage participations, which persons of prudence, discretion, and
intelligence acquire for their own account, and any common trust fund
administered by the trustee.
F. In
any case in which the trustee is required, pursuant to the provisions of the
trust, to divide any trust property into parts or shares for the purpose of
distribution, or 
otherwise, the
trustee is authorized, in the trustee’s absolute discretion, to make the
division and distribution in kind, including undivided interests in any
property, or partly in kind and partly in money, and for this purpose to make
such sales of the trust property as the trustee may deem necessary on such
terms and conditions as the trustee shall see fit.
I have signed my name to this instrument
on March 19, 2002, at Mytown, Anystate.
Willard Thomas Smith
Statement of Witnesses
We, the undersigned witnesses, on March 19, 2002, sign our names to this
instrument, being first duly sworn, and do hereby declare to the undersigned
authority that the testator signs and executes this instrument as his last will
and that he signs it willingly (or willingly directs another to sign for him),
and that each of us, in the presence and hearing of the testator, hereby signs
this will as witness to the testator’s signing, and that to the best of our
knowledge the testator is eighteen years of age or older, of sound mind, and
under no constraint or undue influence.
John Meeks Jennifer Jarrett
1341 Park St., Little Town, Anystate 42 Short Rd., Little Town, Anystate
Notice
that, unlike the living trust shown in Exhibit 3-2, this particular
testamentary trust creates only a contingent
trust (i.e., a trust that comes into existence only if a certain
combination of events happens, specifically, if the testator’s wife fails to
survive him and one or more beneficiaries is under age twenty-one). Not all
testamentary trusts are contingent. For example, a testamentary trust could
provide that a trust be created that gives the surviving spouse a life estate,
followed by a life estate for the children, with the remainder going to the
grandchildren.
The Rule Against Perpetuities
The rule against perpetuities (the rule) originated in
English common law. The rule acts to prevent a transferor from controlling the
disposition of property for an unreasonably long period after making the
transfer. The rule is generally stated as follows:
No interest is
good unless it must vest, if at all, not later than twenty-one years after some
life in being at the creation of the interest.
Thus, the rule
has the effect of invalidating a future contingent interest which might not
vest within twenty-one years after the death of certain people alive (the
measuring lives) at the time the document creating the interest became
irrevocable.[10] The statutes of all states except Alaska,
Idaho, Wisconsin, North Dakota, and South Dakota contain some variation of this
rule. Charitable trusts are exempt from the rule, making them potentially
infinite in duration.
In estate planning, an interest in
property can take effect during the transferor’s lifetime, or it can take
effect at the transferor’s death. A transfer into an irrevocable living trust
is an example of the creation of a property interest that will take effect
during the transferor’s lifetime, whereas a transfer into the typical revocable
living trust and a transfer by will are examples of transfers that create
interests that do not take effect until the transferor’s death.
Thus, to satisfy the requirements of the
rule, the interest must vest, if at all, within twenty-one years after the
death of someone alive at the moment of transfer into an irrevocable trust, or
at the moment of the transferor’s death, for interests created by will or by
revocable living trust.
The rule is satisfied if an interest vests
(or fails) immediately on its transfer. Thus, a statement in a will giving a
bequest “to John, for his life, then to Mary or her estate,” creates vested
interests for both John and Mary at the testator’s death. Nothing (except, in
Mary’s case, the passage of time) will prevent them from receiving possession
of the property. Of course, if John dies before the testator, his interest (a
life estate) will immediately fail. Therefore, the rule need only be used to
determine the validity of contingent future interests; that is, interests that
are not vested when created.
The requirement that the interest must
vest “if at all” means that a contingent future interest will not violate the
rule merely because it failed to vest due to the happening of a contingency
that did not work in favor of a named party. Thus, the transfer “to Jane if she
survives Margo” gives Jane a contingent future interest that must vest or fail
to vest within the permitted time. Failure to vest will not violate the rule,
so long as that failure (or non-failure) must occur within the required period.
Thus, Jane will or will not survive Margo, an outcome that will be determined
as soon as one of them dies. If one cannot be sure that one or the other of
these outcomes will definitely happen during the period, then the interest
violates the rule.
To qualify under the rule, an interest
must vest or fail to vest “not later than twenty-one years after some life in
being at the creation of the interest.” The “life in being” concept is
difficult to explain precisely. For our purposes, however, we can say that the
persons permitted to be “lives in being” are usually those mentioned or
identified in the transfer document itself. Thus, for the transfer “to Carrie
for her life, then to Carrie’s living children,” Carrie would be the sole
measuring life. She is alive at the creation of the children’s interest, and
the length of her life span will determine the devolution of the property.
Taking a second example, the provision that a trust will terminate “twenty-one
years after the death of the last survivor of the class composed of my wife and
those of my issue living at my death” identifies the measuring lives as all the
people in the class. This “perpetuities saving clause,” included in the
testamentary trust in Exhibit 3-3, is a clause that can further protect an
interest from vesting too remotely.
The requirement of vesting within
“twenty-one years” after the death of a life in being was originally included
to enable the transferor to control the disposition of property for his or her
life, for the lives of the children, and for the period of the grandchildren’s
minority, but no longer. For those individuals, all interests created which are
contingent solely on parent survival will usually vest within the required
period. The children’s interest will vest by the time of the death of the
transferor, and the grandchildren’s interest will vest within twenty-one years of
the death of the last surviving child. Thus, their interests will vest within
the required period. On the other hand, a great-grandchild’s interest will
typically (but not always) vest after the twenty-one year period, and thus will
usually fail.
A violation of the rule will cause that
particular interest to be void. The interest will then revert to the transferor
or the transferor’s successors.
Let us consider some examples. In each
case, assume that the transferor has died, leaving a will containing the
disposition clause shown as the initial quote.
EXAMPLE 3 - 1.
Ted’s will stated, “To my wife, Mary, for her life, then to Bill or his
estate.” Both Mary’s and Bill’s interests vested immediately when the will took
effect (at Ted’s death) because at that point, nothing except the passage of
time could delay their possession or enjoyment. Therefore, neither interest is
contingent, that is, dependent on the happening of a future event, other than
the passage of time. Applying the rule, their interests “must vest...not later
than....” Thus, both interests are valid under the rule.
EXAMPLE 3 - 2.
Continuing with the prior example, assume the following is also included
in Ted’s will: “...then to my great, great, great-grandchildren...” Assuming
that Ted is survived only by children and grandchildren, it is possible that
the great, great, great-grandchildren’s contingent interest will vest more than
twenty-one years after the death of all children and grandchildren, who are the
only apparent lives in being at Ted’s death. Thus, their interests are void.
EXAMPLE 3 - 3.
Theresa’s will stated, “To my husband, Bert, for his life, then to my
son James, if still living, otherwise to Ron or his estate.” Bert’s vested
interest is valid under the rule for the same reason that Mary’s was in the
preceding example. Both James and Ron have contingent interests in the
property. Thus, we must ask whether they must vest within the specified time.
Both James’s and Ron’s interests will vest, if at all (either one or the other will
never vest, depending on whether James survives Bert), within “twenty-one years
after some life in being”. Bert is “a life in being” at the time of Theresa’s
death, and both interests will vest or will fail to vest at his death well
within the time limit of the rule. Therefore, both James’s and Ron’s interests
are valid under the rule.
EXAMPLE 3 - 4.
Tom’s will stated, “To my wife Sarah, for her life, then to my son Greg,
for his life, then equally to Greg’s living children when the youngest child reaches
age 25.” Are Greg’s children’s interests valid under the rule? Sarah, Greg, and
any children alive when the trust became irrevocable at Tom’s death are “lives
in being” at the creation of the interest. But more children could be born to
Greg, and they would not be lives in being at the time the trust became
irrevocable, yet they would (by the terms of the trust) each have an interest
that could vest, more than twenty-one years after the deaths of Sarah, Greg,
and any of the children that were born when the trust became irrevocable.
Therefore, the grandchildren’s interests are void, and Tom or his successors
would receive a reversionary interest that follows the death of Greg. Since
Tom’s only living issue is Greg, violation of the rule probably means that Greg
would have the interests in fee. Note that had the trust called for the
interests to vest when Greg’s oldest living child reaches age twenty-one, then
all the children’s interests would vest within a life in being plus twenty-one
years, even if none of the children were born when the trust became
irrevocable, since all children would be born within Greg’s lifetime.
Here are two
general rules of thumb when applying the rule to transfers of interests to
surviving issue:
1. Transferors
usually can create valid contingent interests for their grandchildren, as long
as the interests must vest by the time their grandchildren reach age
twenty-one. The law tacks on the period of gestation to the twenty-one years;
hence a grandchild born after the father’s death can have his or interest vest
at age twenty-one without violating the rule.
2. Transferors
usually can create valid interests for their great-grandchildren only if they
outlive their children or specify the measuring lives as persons alive at the transferor’s
death, e.g., “all interests shall vest no later than twenty-one years after the
death of the last survivor of settlor’s issue who was alive when this trust
became irrevocable.”
Today, not all dispositions in violation
of the rule are invalid. Two types of safeguards designed to overcome the rule
are available to transferors. First, most states have enacted statutes that
limit application of the rule, or even invalidate it entirely. For example,
many states have enacted a “wait and see” statute which, in effect, finds an
interest void only if the interest turns out in fact not to vest within the
required period. In addition, some states have a type of wait-and-see statute
stating that any interest which actually vests within a certain period of time
(e.g., 60 years) after its creation cannot be declared void, even if it
violates the rule. In 1986 the National Conference of Commissioners on Uniform
State Laws approved the Uniform Statutory Rule Against Perpetuities,
recommending that all states enact it. It includes a wait-and-see period of 90
years after creation.
Another statutory safeguard is the
application of the “cy pres” rule to
enable the courts to correct violations of the rule, if at all possible, so
that the transferor’s intentions can be respected. Cy pres, French for “as near as possible,” is a principle used
primarily in the context of charitable bequests, to permit the substitution of
one beneficiary for another when the original charitable purpose is impossible,
illegal, or impractical to carry out. For example, over a century ago, one
testator left property in trust to fight for the cause of abolition. After the
13th Amendment freed the slaves, a court applied cy pres to permit the trust to continue by assisting freed slaves.
The second type of safeguard is to protect
against a perpetuities violation and involves the lawyer’s insertion in the
document of the earlier mentioned perpetuities saving clause, similar to the
one in the testamentary trust in Exhibit 3-3. Such a provision, however, may
act to prevent the client from making an otherwise valid transfer, perhaps
simply because the attorney chose not to test the interest against the rule. In
fact, none of the above safeguards is as effective as the thoughtful analysis
and planning of an expert.
Yet, one must have some sympathy for the
lawyers who use the clause. The rule often requires complex analysis to test a
given interest, and it can even puzzle experts. One state supreme court held
that, given the complexity of the rule, an attorney who created a will that
violated the rule was not liable because he had used the ordinary skill
commonly exercised by lawyers.[11] It is doubtful
that a similar case would be decided the same way today.
The purpose of this discussion has been to
present an overview of the rule against perpetuities. All members of the estate
planning team should have at least a general understanding of the rule,
primarily because it constitutes a constraint on how far into the future one
can maintain control.
This chapter has introduced the documents
used in the transfer of an estate, with particular emphasis on the simple will,
the living trust, and the testamentary trust. The next chapter focuses on the
actual process of transfer of the property disposed of by these documents, with
particular emphasis on the probate process and its handling of intestate
succession. Later chapters will again discuss trusts in connection with saving
estate taxes, with special emphasis on what are called bypass trusts and
marital deduction trusts.
QUESTIONS AND PROBLEMS
1. (a) Which of the following types of property
can be held in joint tenancy: real estate, stocks, vehicles, bank accounts,
and/or tangible personal property? (b) What is the main advantage to this form
of title?
2. Does the right to choose or change the
beneficiary designation reside with the insured? Explain.
3. Is the insured the only one allowed to own life
insurance on his or her life? If not, how does one go about changing ownership
to a life insurance policy?
4. (a) Name the major documents used in the estate
planning process to transfer wealth. (b) Do they all require the same effort in
their preparation? Why or why not?
5. Describe the five major reasons why a will
might not be admitted to probate.
6. Name and describe the two different types of
wills recognized by many states.
7. Can a valid will meet the typical statutory
requirements for both the witnessed will and the holographic will? Why or why
not?
8. (a) What is a simple will? (b) List its major
sections.
9. (a) What is a codicil? (b) Why is it mentioned
in the typical will?
10. (a) Why does the
will nominate two types of guardians? (b) Must the probate judge follow the
testator’s nominations?
11. Why might it be a
mistake to waive (as part of one’s will) the requirement of an executor’s bond?
When does waiving one make the most sense?
12. What is the
purpose of a clause directing that all death taxes be paid from the residue?
13. Why does the
disposition section in a will contain a survival clause?
14. Describe the
contents of the “Statement of Witnesses” section of a will.
15. (a) Distinguish
between a living trust and a testamentary trust. (b) Are all testamentary
trusts established in wills?
16. (a) Of the three documents highlighted in this
chapter, how many are wills? (b) How many create trusts?
17. Contrast the
living trust in Exhibit 3-2 with the testamentary trust in Exhibit 3-3 in terms
of: (a) When the trust takes effect. (b) Who is the appointed or nominated
trustee. (c) Whether the trust principal is subject to probate administration
at the trustor’s death. (d) Who are the income beneficiaries. (e) Who are the
remaindermen.
18. (a) Describe, in general, how the living trust
included in Exhibit 3-2 disposes of income and principal. (b) Which parties
stand to receive a contingent future interest? (c) When, if ever, will each
future interest become vested?
19. List the sections
of a testamentary trust that are common to all witnessed wills and the sections
that are found only in testamentary trusts.
20. Finnegan, a
widower, died last week. He is survived by the following family members
(current ages in parentheses): Two children, Joe (30) and Gary (17). Joe has
four children, Jackie (5), John (3), Carol (2), and Bob (1). Finnegan is also
survived by three other grandchildren: Floyd (4) and Fred (3), the sons of
Finnegan’s deceased daughter Kerri, and Kitty (9), the daughter of Finnegan’s
deceased daughter Shirley. Kerri’s and Shirley’s husbands, Kurt (29), and Rolf
(31), are still alive. Joe has come to your office requesting some information.
Assuming that Finnegan’s large estate will be distributed in accordance with
the testamentary trust contained in Exhibit 3-3, answer the following: (a) Who
will receive the property (i.e., principal), and (b) assuming no more family
members die at a young age, when will they receive it?
21. What is the
purpose of the rule against perpetuities?
22. Helen’s will
leaves one half of her wealth outright to Vinnie and the other half in trust
for Johnny, with all income payable annually to Johnny and, at the earlier of
Johnny’s death or his reaching age twenty-one, corpus to Johnny or his estate.
Does this will violate the rule? Why or why not?
23. Holly’s will
leaves her property in trust, with income to her living children for life, then
income to her then-living grandchildren for their lives, and then remainder
over to her then living great-grandchildren. Who will get Holly’s property?
24. Generally, how do
drafters of trust documents avoid violation of the rule today?