Any individual, who aspires to practice estate planning or elder law, must be proficient in the areas of will drafting, trusts, and basic taxation. One of the fastest growing areas of litigation throughout the country is will contests. The primary reasons for this growth are: (1) the increase in our elderly population and (2) inadequate preparation of estate planning documents. The latter reason stems from the fact that many attorneys utilize a boilerplate approach to estate planning, believing that “one will fits all.” This problem is also found in the utilization of trust mils and computer programs.
Competent attorneys recognize that individual and financial factors must be evaluated prior to preparing a will. An evaluation of these factors will determine what clauses should be utilized in drafting a will, whether a living trust should be utilized as an alternative to a will, and the extent to which federal and state death taxes must be addressed. The focus of this article is on the proper recognition of estate planning issues and competent drafting of wills.
The will is the centerpiece of estate planning. It provides for the legal transfer of assets upon an individual’s death, names an individual or entity to settle the probate estate, names a trustee to administer any testamentary trust established therein, and appoints a guardian for any minor or disabled children. However, it is not the only estate planning document nor does it dispose of all assets.
There are three basic estate planning documents: (1) a will, (2) an advance directive, and (3) a power of attorney. Due to the continued increase in the elderly population, as well as the commensurate growth in medical costs (most notably, nursing home costs), it is imperative to prepare all three documents for clients. Simply put, a will may have little value if an individual’s estate is dissipated by such expenses. A properly prepared advance directive and power of attorney can minimize the severity of these costs.
Moreover, it is imperative to recognize that a will does not necessarily dispose of the entirety of an individual’s estate. It only disposes of the probate estate, which primarily consists of assets owned by an individual in his or her sole name. Assets which are owned with a right of survivorship or beneficiary designation pass outside of a will. Thus, an attorney must evaluate the manner in which assets are held to ensure that the testamentary intentions of the client are met.
An individual who dies without a will subjects his or her estate to the laws regarding intestacy. Intestacy is a state’s statutory scheme governing the disposition of any estate and the direction of its administration absent a valid will. In many states, intestacy laws demonstrate the need for individuals to execute wills. For example, some states divide probate property between children and surviving spouse although there are very few wills that would ever be prepared with such a division. Whether or not an individual has children from a prior marriage or relationship will effect this division.
Disposition of Assets
A prerequisite of will or trust drafting is an understanding of how assets pass from an individual to his or her heirs. In general, property may pass from an individual in four ways during lifetime or at death:
(1) Lifetime Gifts – An individual may transfer, by gift, part or all of his or her property during lifetime. Gifts can be made for a variety of reasons, ranging from simple benevolence to a desire to minimize death taxes. Gifts can be made outright or into a trust.
From a basic standpoint, there are three forms of gifts. One form of gift is that which qualifies for the federal annual exclusion (currently $13,000 per year per donee). Pursuant to the Taxpayer Relief Act of 1997, this amount increases from the long-standing amount of $10,000, in increments of $1,000, as indexed for inflation, commencing retroactively from January1, 1998.
The second form of gift involves gifts in excess of the annual exclusion amount. Such gifts require either the payment of a tax, or a reduction in the exemption amount which can pass free from federal estate tax at an individual’s death. The first two forms involve gifts of present interests. The third form is the gift of a future interest, which can range from the transfer of a remainder interest in real property by a deed to a sophisticated tax planning trust, such as a Qualified Personal Residence in Trust (QPRT) or a Grantor Retained Annuity Trust (GRAT).
When gifts are made, a donor should be aware of the concepts of basis. Gifts, made during lifetime, will be accepted by the donee with the same basis as received by the donor. This particularly impacts gifts of stock and real property which are subject to capital gains taxation upon sale. If held until death, these assets receive a “step up” in basis so that the donee’s basis will be the value of the asset on the donor’s date of death.
(2) Joint Ownership
There are three forms of joint ownership: tenancy by the entirety, joint tenancy with right of survivorship, and tenancy in common. An interest in property, held as a tenancy in common, will pass through an individual’s probate estate. However, a tenancy by the entirety automatically passes to an individual’s spouse upon death. Likewise, a joint tenancy with a right of survivorship passes to a surviving interest holder upon the passing of the first interest holder.
(3) Contract Assets
By contract, two sets of assets do not pass through probate. One set involves assets which have beneficiary designations. These assets include retirement plans, individual retirement accounts, life insurance, and annuities. The second set involves assets which have designations for transfer upon death. These include pay on death (POD) and transfer on death (TOD) accounts.
(4) Probate Assets
Property, held in an individual name, shall pass into an individual’s probate estate upon death. Such property shall pass either through a valid will or, in the absence thereof, the laws of intestacy.
In order to prepare a will, an attorney must review the statutory requirements of the state in which the testator resides. These requirements will vary from state to state. In general, they will set forth a minimum age requirement for a testator (typically, eighteen years of age) as well as the number of witnesses required to ensure the validity of a typewritten will or to make same self-proving.
In some states, a holographic will is recognized. A holographic will is one which is written entirely in the hand of the testator and typically does not require witnesses. Some of the state limit the use of holographic wills such as restricting their acceptance to members of the armed services serving overseas. In many states that do accept holographic wills, a formal court proceeding must be held in order to determine if it will be admitted to probate.
In all states, a testator must have legal capacity to execute a will. Capacity is contextual; as such, the standard to execute a will varies from that to execute a contract or to be determined as incapacitated in a guardianship proceeding. In general, testamentary capacity is a four-prong test. The testator must know: (1) the objects of his affection (i.e. his beneficiaries), (2) the nature of his bounty (i.e. the type and extent of his holdings), (3) the document that he is executing (i.e. a will), and (4) the interrelation of the first three factors. In most states, there is a strong presumption to uphold wills. As such, the threshold to maintain testamentary capacity in will contests is typically slight.