Essential Elements of A Will and Living Trust.
This article outlines the factors that we review for each of our clients when drafting a Will or Living Trust.
While Wills and Revocable Living Trusts ("trusts") are very dissimilar, there are a great many provisions that should be found in both documents. Let's begin by covering those provisions that should be found in both documents.
A good Estate Planning Workbook will assist us in determining your intentions with respect to the extent of property, how title to the property is held, intentions with respect to the disposition of the property, and any special needs, concerns, or circumstances.
The Name and the Domicile of the Client
Either document, a will or a trust, should first state the name of the client. If the client is known by more than one name, the document should note the other name(s). Stating the client's domicile in the document is critical in determining the validity of the documents and where it will likely be enforced. This is particularly important in the case of wills. Remember, a will is usually valid only if it is executed in conformity with the law of the client's domicile at the time of its execution.
Identification of Family Members
Naming the client's spouse and children, (living and deceased, and designated to take from the estate or to be disinherited), or a recital of the absence of either in the document, will help resolve disputes regarding marriage, paternity, and the division of the estate after the client dies. Specific provisions should be included to state the client's wishes as to children born to or adopted by the client after the document is executed. Children of a client born after the execution of a will are entitled to their intestate share of the client's estate unless the will provides otherwise for them or specifically disinherits them. If the client intends to disinherit any child, they should expressly and emphatically state their intention to do so.
A client's spouse in most jurisdictions is entitled to a certain minimum percentage of a client's probate estate. If the client does not allocate at least that statutory minimum to his spouse in the will the surviving spouse can "claim against" the will and take her statutory share.
Expenses, Debts, and Taxes
Either document, a will or a trust, should provide for the •. payment of expenses, debts, and taxes, and explicitly state what sources those funds are going to come from. How expenses, debts, and taxes will be paid and from what sources directly affects the ultimate disposition of assets among the beneficiaries. This often overlooked provision of a will or trust is actually dispositive in nature, and not just administrative. The important of this provision cannot be overemphasized. Let's look at each:
The principal issue regarding the payment of administration expenses is apportionment and reimbursement. State law may or may not address the issue of apportionment imbursement of expenses between probate and nonprobate property. If the will or trust provides instructions for the apportionment and reimbursement, its terms will control. Most often the document will provide that the expenses of administration will be paid from the residuary estate. That will certainly simplify things but, particularly if the trust is not fully funded, or if property such as life insurance, IRAs, and TOD or POD accounts are passing outside of probate other options may be desirable.
The trust or will may also provide instructions for the clients' funerals but that is usually a mistake. It is not usually a good idea to provide for organ donations or funeral or burial arrangements in a will or a trust because neither may be readily available at the time of death. Funeral arrangements should be the subject of a precatory letter that the lcient has discussed with his spouse and his children. Organ donations are best made in a separate instrument such as the client's driver's license or a separate anatomical gift election form.
A will or a trust will customarily provide for the payment of the client's debts. The absence of the provision will not preclude the payment of properly filed claims against the client's estate. In the case of debts secured by real estate, notes receivable, or other "hard" assets, the heir or devisee typically takes the asset subject to the debt If the client intends for his executor or successor trustee to pay off the debt securing the property, the trust or will must specifically so state. Likewise, if the client has borrowed against his life insurance policy the proceeds of the policy will be used to pay off the debt unless the will or trust specifically instructs the executor or successor trustee to use the proceeds of the residuary estate to satisfy the debt.
Again, the primary issue regarding the payment of estate, inheritance, and GST taxes is apportionment and reimbursement. In the absence of state law or directions in the document, the common law is that the burden of paying taxes falls entirely on the residuary estate. The IRC adopts the common law that, absent a controlling state law or a contrary provision in the will or trust, the burden of paying the taxes due is on the executor or successor trustee (IRC. Sec 2002).
The IRC does provide for reimbursement to the estate for federal taxes on insurance proceeds, power of appointment property, QTIP property, and transfers with retained interests under IRC 2036. The federal GST tax contains its own apportionment provisions under IRC 2603.
When there is both a will and a trust, the tax payment provisions must be coordinated. The usual approach is to provide for payment from the residue, subject to reimbursement for taxes and charges incurred associated with life insurance proceeds, power of appointment property, QTIP property, special bequests and transfers with a retained interest under IRS 2036.
The will must dispose of all of the client's property subject to probate administration. The trust must dispose of all the client's property held by the trust. The dispositive provisions must include any desired specific gifts, disposition of specific items of tangible personal property, the exercise of any testamentary powers of appointment, and the disposition of the residue of the estate. In any given case there may be a number of special considerations that have to be taken into account.
Specific Gifts and Disinheritance
If a specific item left to a specific heir has been sold between the time the will or trust was written and the death of the client there is no "make-up." The will or trust must clearly identify the property being disposed of and the intended beneficiaries. In the case of charitable gifts s ecial care must be used to properly identify both the charity and the charitable purpose of the gift.
All the dispositive provisions of the trust or will should provide for the eventuality that the beneficiary might not survive the client, and name an alternate beneficiary. Otherwise, under common law, if the beneficiary of a specific gift does not survive the client, the gift would become a part of the residuary estate, or, under an applicable anti-lapse statute it would pass to the beneficiary's heirs, neither of which the client may want.
A client may want to disinherit or significantly limit the inheritance of his children or certain descendants and heirs. No-contest provisions are commonly used in conjunction with a disinheritance provision to discourage the contest of the will or trust. Under a typical no-contest provision, a contesting beneficiary loses any interest he or she would otherwise receive under the will or trust if they contest the document.
Tangible Personal Property and Income Taxes
Either a will or a trust should provide for the disposition of tangible personal property separately from the disposition of the residue to avoid having income from the residuary estate attributed to the recipients of tangible personal property for income in respect of a decedent (IRD) tax purposes.
Under IRC 663, distributions (whether in cash or in kind) to residuary beneficiaries during the administration of an estate will cause income of the estate to be taxable to them. The will or trust must make it clear that if specific items of property or specific sums of money are distributed to specifically named individuals, the income taxes associated with those items will be assessed to those beneficiaries and not to the residuary estate.
Powers Testamentary of Appointment
If the client is the donee of any testamentary powers of appointment, (remember, a power of appointment is an irrevocable gift), he or she and their lawyer and financial advisor should determine whether to accept the gift and exercise the power considering both the tax implications of an acceptance and the consequences if the power is not accepted. Any exercise of a power of appointment should clearly identify the instrument creating the power, the power itself, and should conform to any requirements under the granting instrument. Federal and state statutes often control this subject.
Due to the fact that a power of appointment is an irrevocable gift, reciprocal powers of appointment usually are not written into the wills or the trusts of couples involved in a second marriage where there are children of a prior marriage because neither the husband nor the wife usually wants to give their surviving spouse the opportunity to disinherit their children.