WILLS, Trusts and Estates
TRUSTS
· Trust:
Any arrangement by which title to property
(real and/or personal) owned by one person (the grantor) is held by another person (the trustee) for the benefit of a third person
(the beneficiary). In addition to a designated beneficiary
and a designated trustee, a valid trust requires: [4290.01] [4291.01] [4292]
(1) funds or other
property sufficiently identified to enable title to pass to the trustee, and
(2) actual delivery by
the grantor to the trustee with the intent that title pass to the trustee.
Thus:
property is transferred by a settlor/grantor to a trustee for the benefit of an
identified beneficiary usually in a written instrument describing the terms of
the transfer.
· Trustee:
The person (designated by will, trust or otherwise) holding title to,
and responsible for dealing with, the property of a trust. A trustee must act
with honesty, good faith, and prudence in administering the
trust.
· Inter Vivos Trust: A trust created by the grantor and effective during the grantor's lifetime.
· Testamentary Trust: A trust created by will and, therefore, not effective until the grantor's
death.
· Estate: Similar
to a trust, but used to wind up the affairs of a deceased person to distribute
property to the beneficiaries in an efficient and accurate fashion and comes
into existence at decedent’s death.
Tax of
Estates: generally a property oriented tax, although the estate may pay
income tax on any earnings it has received. [4290.06]
Tax of
Trusts: primarily
pays income taxes if it
has not distributed the income to the beneficiary.
Income
beneficiary: can only receive income generated by the
trust, not the principal.
Principal
beneficiary: must
wait to receive income from the trust until the income beneficiary interest
ends (such as death or a specific period of time).
TRUSTS- types and other goodies
· Corpus: the trust principal (the assets)
· Creator of a trust: The grantor (or settlor or trustor)
· Living trust: has life during the grantor’s
lifetime.
· Testamentary trust: as noted above, begins “Life”, so
to speak, when a person dies (part of the will).
· Trust property: can be anything of value, and
usually allows for additional property to be added into the trust.
· Advantages of trust: flexible, gets it out of the
estate, management or succession concerns usually resolved, protection of the
assets and beneficiaries.
· Disadvantages of trust: loss of true control of the asset
in some cases, and more expensive, usually requires a separate tax return.
· Failure of trust: usually a technical issue, which
means the property goes back to the grantor.
· Charitable Trust: A trust in which the
property held by a trustee must be used for a charitable purpose, such as the
advancement of health, education, or religion.
· Complex Trust:
in tax terms, the trust can accumulate income instead of a mandatory
distribution of the income to the beneficiary.
· Simple Trust: Must distribute all income to the
income beneficiary and cannot retain any income.
· Spendthrift Trust: A trust created to protect
a beneficiary from spending all the money to which he or she is entitled, by
parceling out the trust proceeds over time.
· Totten Trust: A trust created by the
deposit of a person's own money in his or her own name as trustee for another.
· A Totten trust is
revocable at will until the grantor dies or completes the gift by some
unequivocal act or declaration.
· Resulting Trust: An implied
trust arising from the conduct of the parties, where one party holds legal
title to another's property, but only for the other's benefit.
· Constructive Trust: An equitable trust imposed
by a court in the interest of fairness and justice when someone wrongfully
holds legal title to property.
WILL TERMINOLOGY [4293]
· Will:
An instrument prepared by or at the direction of a testator (the person who signs the will)
directing what is to be done with her property upon her death.
· The testator may revoke any part or all of her will,
and/or amend it by a codicil, during her
lifetime.
· No interest
in the testator's property passes under the will prior to the testator’s death. But, of course, the
person is free to gift things during their lifetime.
· Executor: A person appointed by the testator in her will to see that the will is
administered and the testator's property is disposed of as the testator
wished. In other
words, their agent after their death.
· Administrator: A person appointed by a probate court to handle the disposition of an intestate's
property or to handle the disposition of a testator's property if the executor
named by the testator cannot serve.
Types of “Gifts” by Will:
·
Devise: A gift of real property by will to a devisee.
·
Legacy: A gift of personal property by will to a legatee.
· Specific: A specific
identifiable
piece of property
· General: A
more generic description of type of property, such as “all my real estate” or
“I give my niece $30,000.”
· Residuary: Basically
everything that is left after giving specific or general gifts.
WILLS: REQUISITES FOR VALIDITY
· Testamentary Capacity:
The testator must be of legal age (18) and sound
mind at the time the will is made. Generally, a testator who is of legal age
must:
(1) intend
the document to be his or her last will,
(2) comprehend
the kind and character of the
property being distributed by the will, and
(3) comprehend and remember the "natural objects of his [or her]
bounty" (i.e., the intended beneficiaries).
Writing Requirement: Generally, a will must be in writing.
· Holographic Will: A will that is completely
hand-written.
· Nuncupative Will: An oral will made and
declared before witnesses (e.g., a "deathbed will"). In
· Other Formalities:
The testator's signature must appear on the face of the will,
and, in the case of non-holographic wills, must be declared before and signed
by witnesses. In
WILLS: REVOCATION [4293.11]
· A testator may revoke his or her
will at any time prior
to his or her death. Revocation may be accomplished:
(1) By Physical Act -- intentionally burning, tearing, ripping up, canceling,
obliterating, or otherwise destroying the will or directing another to do so in
the testator's presence;
(2) By Subsequent Writing -- intentionally
making a new will or amending or revoking any or all of a will by means of a
codicil; or
(3) By Operation of Law -- due to marriage, divorce, or annulment, or the
birth of one or more child(-ren)
after the will was executed. Note that in Texas and other
states, divorce is treated as the divorced spouse passes away before the
testator (in other words, they get nothing, even if the old pre-divorce will is
never revised)
PROBATE
· Basically involves admitting the
Will to be “proved” as being valid through the
court, which then gives the Executor the right (in some states under court supervision,
but not Texas) to handle the financial affairs of the estate, including selling
property, disposing of assets, and distributing the bounty (the assets of the
estate) to the beneficiaries. In some
states this can be very expensive, in
The
simplest example of what might be transferred “out of probate” would be an
insurance policy proceeds to the beneficiary.
Why? It
is handled via contract (the agreement between the insurance company
and the deceased). Now, if the insurance
was payable to the estate, then it would pass under the direction of the will
and through probate. Other examples are
properties that are handled via property agreements (joint tenancy, etc.). Another example would be any property in a
trust outside the title of the decedent would not be part of probate. In other words, and vastly oversimplified, things that are not
“titled” to the decedent do not go through probate.
INTESTACY
· Intestacy: When a person dies without leaving a valid will, he or
she is said to have died intestate. In such cases, the deceased's
property passes according to law, rather than according to the deceased's
wishes.
· Generally speaking, an intestate's property
passes first to any surviving spouse and children.
· When the intestate has no surviving spouse
or children, the general order of inheritance is:
(i) surviving grandchildren, if any; if none then
(ii) surviving siblings
of the intestate, if any; if none then
(iii) surviving parents,
if any; if none then
(iv) collateral
heirs -- surviving nieces, nephews, aunts, and uncles of the intestate.
· Stepchildren are not entitled to inherit unless
they are adopted by the intestate prior to his or her death (again, assuming we
have no will- the decedent can always provide for anyone they chose in a will).
Illegitimate
children inherit only from their
mother, unless otherwise provided by law.
There is a separate web page
dealing with
Per Stirpes:
per the roots: imagine the
following
P
C1 C2 C3 C4
Gc1 Gc2
Parent passes away.
C1 passed away before P. What
happens is this under per stirpes: GC1 and GC2 get what C1 would have had (in
other words, the 25% C1 would have had, or 12.5% each.)
CONTRAST: Per Capita:
Same facts, but what happens under per Capita is
this: each living beneficiary shares
equally. Thus, GC1, GC2, C2, C3, and C4 each receive 20% of the bounty.
With the “graying” of
Planning for disability includes consideration of a Durable
Power of Attorney, a Health Care Power of Attorney, and a Living Will (or
Physicians’ Directive).
Medicaid Issues are
also considered with Elder Law. Medicaid
is the health care to the elderly, administered by the State, not the Federal
Government. It is not Medicare.
Medicaid planning is
most important when it comes to someone needing to be in a nursing home, as
only limited assets may be held by the person to be eligible. This often causes the person to “go broke”
before they can be eligible for Medicaid.
ADMINISTRATION of
Wills and Trusts
Trusts:
the Trustee is responsible for all decisions involving the trust assets
(corpus). This is a fiduciary
relationship (high trust), and if the trustee breaches this trust, they are
liable to the beneficiary PERSONALLY for such breach. The trustee generally,
but not always, has the same power over the assets as if it were the original
owner.
In essence, the trustee must exercise reasonable care.
The trustee cannot act in any fashion contrary to the trust
terms. They cannot use the property for their own use, cannot borrow against
it, etc. See 4295.01e
Wills: Generally the same as trustees, except the executor has
the responsibility to close out the estate and distribute it to the
beneficiaries, (contrast to trustee, who conserves/enhances the property for
the beneficiary).
Allocation between
Principal and Income
This is seemingly complex stuff, but it shows up on the
CPA exam all the time.
Trusts:
Who cares? Recall the distinction between the income and
remainder interest beneficiaries. They would. It also matters who (either the
beneficiary or the trust) who pays tax on matters.
In general, the decision is made based on state law or
what the trust says.
What are we talking about?? For example, we generally
think a capital gain is income. But, it may be considered to be part of the principal in legal/trust
terms.
Some everyday trust accounting examples:
Income:
Rents
Interest
Cash dividends
Royalties
Principal:
Proceeds for sale
of the original principal including the gain on the property, if any (why? The
form of the original (principal) investment has changed)
Repayment of
loan
Insurance
proceeds for damage to principal
Stock splits,
stock dividends, merger etc stuff (see 4296.05 g)
You can see how an income beneficiary might like to
partake in “profits” of sale of the principal, but they are generally not
allowed to do so.
Estates:
Generally all administrative costs are charged to
principal, including:
Funeral
Debts of decedent
Estate taxes,
if any
Attorney/cpa fees
Court costs
TERMINATION
Estate: terminated when the executor or court has completed all
required transfers. The executor no
longer can act.
Trusts:
Time of the trust
has concluded (if so established)
Settlor
revokes the trust, if allowed
Settlor and
beneficiaries all agree to end
Trust failure.
(i.e., college expense trust, and student dies)
Purpose of
trust completed
Cy pres:
failure of a charitable trust usually not allowed if the original intent
can continue. For example, I leave money in trust for the cure of cancer. A
cure, thankfully, is found. That money then could be used for research on some
other horrid disease. Thus, the doctrine
of cy pres is to allow a court to substitute a similar worthy cause for the
original purpose/cause.