CHAPTER 44 WILLS, ESTATES, AND TRUSTS

1. CHAPTER 44WILLS, ESTATES, ANDTRUSTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

2. TRANSFER OF AN ESTATE • Everyone has an estate, no matter how small. • States govern the transfer of estates under probate codes. • Probate Codes vary greatly from state to state.

3. WILLS • Specifies who should inherit property, names guardian for minor children, and/or appoints a personal representative for the estate. • To make changes not necessary to write a new will. • Testator simply makes the changes in a codicil.

4. WILLS • Formal Wills: • Drafted by attorney. • Signed by testator and witnessed by at least two people. • Holographic Wills: • Written, signed, and usually dated in the testator’s own handwriting.

5. WILLS • Nuncupative Wills are oral. • Usually used only to dispose of personal property. • Must be heard by two or three disinterested witnesses. • Generally to be valid: • Made by civilian who anticipates death from an injury received that day. • Made by soldier or sailor who is in peril or in fear of death.

6. WILLS • Matching Wills: • Appropriate when testators have identical testamentary objectives. • Mutual wills: separate wills in which testators have matching provisions in their respective provisions. • Joint wills: two people sign the same document as their last will. • Contractual wills: people enter into valid contract in which one or more promise to make certain dispositions in their wills.

7. REQUIREMENTS FOR A VALID WILL • Vary from state to state. • Person must be an adult the time the will is executed. • Testator must have testamentary capacity. • Requires person: • Understands the nature and extent of his or her assets. • Knows who his or her close relatives. • Understand the purpose of a will.

8. TESTAMENTARY DISPOSITIONS AND RESTRICTIONS • Person’s ability to make testamentary dispositions has limits. • Common restrictions: • There are limits on giving to charity called mortmain. • Trust established too long a period of time. • Do not allow testator to will money to pets. • Will provisions against public policy.

9. TESTAMENTARY DISPOSITIONS AND RESTRICTIONS • If testator suspects someone will want to contest will, a no-contest clause may be inserted in it. • Generally, a will may exclude family members. • Actual heirs may receive their shares under different theories or philosophies. • Will can be ignored if it was signed under fraud, duress, or undue influence.

10. INTESTATE SUCCESSION • People often fail to sign or execute a valid will. • States provide for the transfer of assets of these people. • For people whose will does not completely dispose of their property. • Varies from state to state.

11. PROBATE AND ESTATE ADMINISTRATION • Probate determines the validity of a will. • Probate ensures estates are properly administered. • Representative must notify creditors, pay debts, pay an estate taxes, and distribute the remaining assets according to the will. • Personal representatives administer the estate and owe fiduciary duties to the beneficiaries.

12. AVOIDING PROBATE • Property not subject to probate: • Entireties property. • Joint tenancy with rights of survivorship. • Life insurance paid to named beneficiary. • Ownership not subject to probate: • Pay-on-death ownership.

13. AVOIDING PROBATE • Advantages: • May reduce time and costs. • Provides privacy. • Disadvantages: • The estate will still pay taxes. • More paperwork. • Higher inheritance or estate tax liability. • Creditors will not be discharged for failing to file a claim against the estate. • Unprotected beneficiaries and creditors by law.

14. TRANSFER TAXES • Federal Transfer Taxes: • Gift tax. • Estate tax. • Generation-skipping transfer tax. • State Transfer Taxes: • Gift tax. • Estate or inheritance taxes.

15. RETIREMENT PLANS • Pension plans have both income tax and transfer tax consequences. • Employer plans are: • Defined-benefit plan occurs when an employer promises to pay the retiree a set benefit based on percentage of employee’s average earnings and number of years worked under the plan. • Defined-contribution plan occurs when an employer promises to contribute a certain amount to the plan each year.

16. DURABLE POWERS OF ATTORNEY AND LIVING WILLS • Durable powers of attorney used to make financial or medical decisions. • Maker concerned that he/she may become unavailable, incapacitated, or incompetent. • Durable power of attorney appoints a person to make decisions for the maker. • Living will does not dispose of assets at owners death.

17. DURABLE POWERS OF ATTORNEY AND LIVING WILLS • Living will explains how maker feels about the administration of certain medical treatments.

18. TRUSTS DEFINED • Fiduciary relationship where specific property is transferred to the care of a trustee. • Trusts may be voluntary arrangements created by the property owner. • Trust may be legal arrangements imposed by the courts or implied by law.

19. EXPRESS TRUSTS • Voluntarily created by property owner. • Have a creator, a trustee, and one or more beneficiaries. • To be valid: • Intention or purpose of creator must be expressed. • Inferred from actions by creator.

20. EXPRESS TRUSTS • Purpose creators establish trusts: • Provide for more than one beneficiary. • Protect beneficiaries from themselves. • Legally reduce taxes. • Under Statute of Frauds most trust deeds must be in writing.

21. EXPRESS TRUSTS • Trust terminates: • When purpose is completed. • Term is over. • By mutual agreement. • It becomes uneconomical. • Revocable trust can be revoked by creator. • Irrevocable trust may not be terminated during the specified term of the trust.

22. EXPRESS TRUSTS • Private Trusts. • Created for an individual and is limited by the time period specified in the rule against perpetuities. • Charitable Trusts. • Trusts where money is given to a charity for a public purpose and is tax free.

23. EXPRESS TRUSTS • Additional Types of Express Trusts • Accumulation trust: reinvests income. • Sprinkling trust: trustee determines which beneficiary receives income and how much. • Spendthrift trust: protects beneficiary from imprudent spending habits. • Discretionary trust: trustee has discretion to pay or not pay beneficiaries.

24. ADVANTAGES OF TRUSTS • Flexibility. • Funding of trust can occur over a period of time.

25. DISADVANTAGES OF TRUSTS • If trust is irrevocable, creator cannot withdraw money for emergencies. • Fees. • May increase the amount of taxes paid.

26. SELECTION OF TRUSTEES AND EXECUTORS • Trustees and executors have broad powers and discretion, important to select them wisely. • If decedent does not have valid will naming executor, the probate court will appoint an administrator. • Administrators, executors, and trustees referred as fiduciaries.

27. SELECTION OF TRUSTEES AND EXECUTORS • Corporate fiduciaries: • Do not die. • Generally have the expertise needed to do a competent job. • Does not need to be bonded for faithful performance of its duties. • Last forever. • Charge fees.

28. SELECTION OF TRUSTEES AND EXECUTORS • Individual fiduciaries: • Do not last forever. • May serve without fees. • Have more knowledge about the business. • Personally concerned for the well-being of the beneficiary. • Biased toward certain beneficiaries.

29. DUTIES OF TRUSTEES AND EXECUTORS • Trustee’s duties: • Is suppose to protect and preserve the trust corpus. • Make the assets productive. • Obligation to follow the terms of the trust. • Duty of care. • Trustees must act with the care, skill, and prudence of a businessperson managing his or her own property.

30. DUTIES OF TRUSTEES AND EXECUTORS • Trustee’s duties: • Duty of loyalty. • Not to take advantage of situations involving conflicts of interest. • To be as impartial as possible among beneficiaries. • Duty to diversify the types of investments. • Duty to account. • Trustee must not mix personal funds with trust funds.

31. DUTIES OF TRUSTEES AND EXECUTORS • Trustee’s duties: • Trustee must not borrow money or mortgage trust property. • Trustee will have incidental authority to carry out ordinary duties. • Executor’s duties parallel those of a trustee. • Both have fiduciary duties to beneficiaries.

32. DUTIES OF TRUSTEES AND EXECUTORS • Executor responsible: • For filing estate and inheritance tax returns. • Paying the applicable taxes. • Filing accounts with probate court.

33. IMPLIED TRUSTS • Implied trusts created by operation of law or imposed by courts. • Resulting Trusts • Owner of property disposes of property but the disposition is not complete. • Person purchases real property with his/her own money and puts title in name of another, without intending to make a gift. • Resulting trust occurs only if the owner is acting in good faith.

34. IMPLIED TRUSTS • Constructive Trusts: • An equitable remedy. • Arises by operation of law to redress a wrong or to prevent unjust enrichment. • Created to correct unfair results.