estate: chapter 2: basic estate planning documents

© 2007 ME™ (Your Money Education Resource™)

Estate Planning for Financial Planners

Chapter 2:Basic Estate Planning Documents

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© 2007 ME™ (Your Money Education Resource™)Updated on 12/12/06

Basic Documents in an Estate Plan

Wills Side Letters of Instruction Powers of Attorney for Property Durable Powers of Attorney for Health

Care Living Wills or Advance Medical

Directives Do Not Resuscitate Orders (DNRs)

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Wills

Legal document providing the testator (will-maker) the opportunity to control distribution of his property at death; avoids state’s intestacy law distribution scheme.

May be revoked or amended by testator.

Effective only upon death of the testator.

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Intestacy What is it?

Dying without a valid will or Dying with a will that does not dispose of all probate

property. Majority of individuals die intestate Intestacy laws are state driven

Illinois Spouse, no descendants: spouse 100% Spouse, descendants: spouse 50%, descendants 50% No spouse, all to descendants equally No descendants, siblings No siblings, parents No parents, grandparents All else fails, state of Illinois

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Risks in Intestacy Children are usually treated equally, which may not

be equitable. Per capita

All beneficiaries receive an equal amount Fair????

Or adjust based on… One child much younger, hasn’t completed college Financial success of children Previous gifts

One to Princeton; one to EIU If not per capita, discuss with children Court-appointed administrator vs. executor.

Surety bond

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Advantages of a Will (1 of 2)

Selection of executor/executrix as decedent’s personal representative to administer the estate.

Transfer of assets that are not automatically transferred at death.

Designation of guardian for minors and or dependents.

Transfer of assets to charity. Utilization of marital deduction. Disinheritance of unworthy heirs. Minimization of estate tax burden. Direct estate’s share of tax burden as well as

source to pay such taxes.

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Limitations of Wills Does not prevent disinherited parties from

contesting will. Courts can invalidate certain restrictions or

sections of a will (too many constraints on transfer of assets).

Will does not supercede automatic transfers upon testator’s death (i.e., contractual arrangements).

Poorly drafted will may become invalid or testator’s wishes may not be understood.

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Types of Wills (1 of 2)

Holographic Wills Written in testator’s handwriting. Must be signed and dated by testator.

Noncupative Wills Oral. Dying declarations made before sufficient

witnesses. Not valid in all states.

Statutory Wills Generally drawn by an attorney, complying with

the laws for wills of the domiciliary state.

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Types of Wills (2 of 2)

Mutual or Reciprocal Wills Two identical wills leaving all assets to the other.

Sweetheart wills. Not binding on the other party until death and

can be changed. What happens when second spouse dies?

Joint Will One will for two people. At the death of the first person, the other is

contractually bound by the will.

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Legal Capacity to Execute a Will Mental Capacity

Understand what is being done by writing of will. Recognize and recollect the property being disposed

by the will. Recognize the relationships of those friends and

relatives who have any claim to testator’s assets. “Sound Mind” Rules

Not as rigorous as capacity rules required to form legal contracts.

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Common Clauses in Wills (1 of 3)

Introductory clause Identifies testator, testator’s residence, state of

domicile, and next of kin. Declaration Clause

Identifies document as last will and testament of testator.

Revokes all previous wills and codicils of testator. Bequests Clause

Directs specific property to be passed to others. Residuary Clause

Distributes the residue of the estate.

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Clause for identification and selection of executor/executrix (and successors).

Guardianship Clause Names guardian for minors or other legal

dependents. Grandma vs. Aunts

Appointments and Powers Clause Clause directing payment of debts and taxes

(includes sources from which to pay them). Attestation Clause

Provision at end of document signed by the witnesses as authentication of testator’s will.

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Self-Proving Clause Declaration signed by the notary stating that he

witnessed the testator and the witnesses sign the will.

Simultaneous Death Clause Survivorship Clause

Can’t exceed 6 months or won’t qualify for marital deduction

Disclaimer Clause Disclaiming party cannot have benefited. Must be made in writing within (9) months. Person disclaiming can’t direct disposition of

property.

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Revoking a Will/Codicils To revoke the testator can:

Destroy the old will by shredding or burning it. Create a new will specifically revoking the old one.

Codicils Supplement to a will. Separate document that must meet all the legal

requirements of a will. Modifies, explains, or amends will.

Testator must be competent each time a codicil is written.

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Side Instruction Letter Generally details the testator’s wishes regarding

the disposition of specific tangible possessions as well as the funeral and burial wishes of the decedent. Who gets Grandpa’s rocking chair?

While letter has no legal standing, the executor will generally carry out the wishes of the decedent.

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Statutes Affecting Wills (1 of 2)

Forced Heirship Requires a certain portion of the estate to

transfer to the decedent’s children. In general, if child born after will executed gets

intestate share Intentionally omitted, generally get nothing Generally name heirs as surviving children

instead of naming specific kids Unless not sure who your kids are

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Marital Portion Requires a certain portion of the estate to

transfer to the decedent’s surviving spouse. Can generally take against will and get

intestate share Felonious Homicide Statutes

Prevents legatees and heirs who have been convicted of intentionally killing the decedent from inheriting under the decedent’s will or through intestacy.

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Divorce Statutes Invalidate a provision in a will that

leaves assets to a former spouse. Still get life insurance, retirement plans

Anti-Lapse Statutes Presumption that a if a close relative

such as a child or sibling is not alive then the testator would have wanted the assets to flow to their heirs.

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Provision in wills

No contest clause Limit or eliminate share received by

beneficiary if contest amount received under will Less than 3% of wills contested

2/3 of challenges unsuccessful

More contests in future Divorce Longer live expectancies

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Avoiding Will Contests Will contests often occur in nontraditional

relationships. Being open with heirs before death may alleviate

some of the conflict. Well-drafted wills can often discourage will

contests. Alternative options may be appropriate (lifetime

gifts, trusts, property titling). Validation of the will by the courts before the

testator’s death may be an option if the state allows.

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Power of Attorney (1 of 3)

Legal document authorizing a trusted person to act on one’s behalf. General Power of Attorney (broad)

• Causes inclusion in gross estate Limited Power of Attorney (specific)

Does not survive death of principal. Power of appointment

Power to transfer property

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Power of Attorney (3 of 3)

Durability Feature Power remains in effect even if the

principal becomes incapacitated. Springing Power available

Agent’s power “springs” into existence upon some defined event or determination.

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Advantages/Disadvantages of Power of Attorneys

Advantages Eliminates need to go to court to appoint a

guardian of the estate. Allows agent to sell property if needed.

Disadvantages Agent may abuse the power. If agent holds a general power of

appointment, then the assets will be included in the agent’s gross estate if he predeceases the principal.

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Durable Power of Attorney for Health Care

Appoints agent to make health care decisions in case of maker’s incapacity.

Power of agent does not expire with person’s incapacity or disability; only at death.

Usually uses springing power. Power always revocable by principal. Example of Power of Attorney for Health

Care.

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Living Wills/Advance Medical Directives

Legal document expressing an individual’s last wishes regarding sustainment of life under specific circumstances. Exception for pregnant patient.

Some states have a registry so it can be filed.

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Do Not Resuscitate Order

Declares the principal’s wish to avoid having CPR performed in the event the heart stops beating.

Filed with medical records and a state registry, if available.