Wills and Trusts - Chp. 53 - West Bus. Law - 7th Edition


The key points in this chapter include:

1. Distribution of an estate without probate.

2. The responsibilities of estate administration.

3. Different kinds of trusts.

4. A trustees duties and powers.

5. How a trust terminates.

This chapter covers some of the laws governing the succession of property. (See also Chapter 48 on joint tenancy and Chapter 52 on insurance.) A person can direct the passage of property after death by will. If no valid will has been executed, state intestacy laws apply. A person can also transfer property with a trust.

I. WILLS
A will is a declaration of how a person wants property disposed of after death; a formal instrument that must follow the statutory requirements to be effective.

A. TERMONOLOGY OF WILLS
A testator is a person who makes a will; a probate court oversees the administration of a will by an executor (appointed by the testator in the will) or by an administrator (appointed by the court).

B. LAWS GOVERNING WILLS
Vary from state to state. Some of the law includes

1. Uniform Probate Code (UPC) Codifies principles and procedures for the resolution of conflicts in settling estates and relaxes some of the requirements for a will.

2. Revised UPC
In 1990, the UPC was revised to further relax gormal will requirements and to provide for the interpretation of will substitutes and other intervivos transfers (see below).

C. TYPES OF GIFTS
A gift of real estate by will is a devise; the recipient is a devisee. A gift of personal property is a bequest or legacy; a recipient is a legatee. Gifts can be specific, general, or residuary. If there are not enough assets to pay all general bequests, an abatement reduces the gifts.

D. REQUIREMENTS FOR A VALID WILL

1. A Testator Must Have Capacity
When a will is made, the testator must be of legal age (in most states, at least eighteen years old) and sound mind (a person can be adjudged mentally incompetent or have delusions about certain subjects and, during lucid moments, still be of sound mind).

2. A Will Must Be in Writing
An outside document can be incorporated by reference if it exists when the will is executed and is identified in the will. In a few states, an oral (nuncupative) will is valid to pass personal property below a certain value if made in the expectation of imminent death.

3. A Will Must Be Signed by the Testator
The testator must sign with the intent to validate the will; the signature need not be at the end.

4. A Will Must Be Witnessed
The number of witnesses, their qualifications, and the manner in which it must be done vary from state to state.

5. In a Few States, a Will Must Be Published
Publication is an oral declaration by the maker to the witnesses that the document they are about to sign is his or her will.

E. REVOCATION OF WILLS
A will is revocable, in whole or in part, by its maker any time during the makers lifetime by physical act (intentionally obliterating or destroying a will, or directing someone else to do so); by a document (a codicil, a new will); or by operation of law (marriage, divorce, annulment, birth of child).

F. RIGHTS UNDER A WILL
A surviving spouse can renounce the amount given by will and elect a forced share, if the share is larger than the gift. In most states, a forced share is one-third of an estate or an amount equal to a spouses share under intestacy laws (see below). A beneficiary can renounce his or her share.

G. PROBATE PROCEDURES
Probate: establish the validity of a will and administer the estate. The UPC includes rules and procedures for resolving conflicts in settling estates and relaxes some of the will requirements.

1. Informal Probate
In some states, cars, bank accounts, etc., can pass by filling out forms, or property can be transferred by affidavit. Most states allow heirs to distribute assets themselves after a will is admitted to probate.

2. Formal Probate
For large estates, a probate court supervises distribution.

3. Property Transfers outside the Probate Process
Will substitutes include living trusts (see below), life insurance, and joint tenancies.

II. INTESTACY LAWS
Statutes of descent and distribution regulate how property is distributed when a person dies without a valid will. The rules vary widely from state to state, but typically, the debts of the decedent are satisfied out of his or her estate, and the remaining assets pass to the surviving spouse and children.

A. SURVIVING SPOUSE AND CHILDREN

1. Legitimate Heirs
The spouse usually receives a share of the estate (such as one-half if there is a surviving child); the children receive the rest. If no children or grandchildren survive, the spouse succeeds to the entire estate.

2. Illegitimate Children
In some states, intestate succession between a parent and an illegitimate child can occur only if the child is legitimized by ceremony or was acknowledged by the parent.

B. ORDER OF DISTRIBUTION

1. Lineal Descendants
If there is no surviving spouse or child, then grandchildren, brothers and sisters, and (in some states) parents share. Generally, title descends (to the children, etc.) before it ascends (to the parents, etc.).

2. Collateral Heirs
If there are no lineal descendants, then nieces, nephews, aunts, and uncles share. If none of these survive, property succeeds to the next of kin of collateral heirs (relatives by marriage are not considered kin).

3. Methods of Distribution
Per Stirpes: a class or group of distributees take the share that their deceased parent would have been entitled to inherit had that parent lived. Per capita: each person takes an equal share of the estate.

III. TRUSTS
Arrangements by which a grantor (settlor) transfers legal title to the trust property to a trustee, who administers the property as directed by the grantor for the benefit of the beneficiaries.

A. ESSENTIAL ELEMENTS

1. A designated beneficiary.

2. A designated trustee.

3. A fund sufficiently identified to enable title to pass to the trustee.

4. Actual delivery to the trustee with the intention of passing title.

B. EXPRESS TRUSTS

1. Living Trust (or Inter Vivos Trust)
Created by trust deed to exist during the settlors lifetime.

2. Testamentary Trust
Created by will to come into existence on the settlors death (if the will is invalid, the trust is invalid). If not named in the will, a trustee is appointed by a court. Trustees actions are subject to judicial approval.

3. Charitable Trust
Designed to benefit a segment of the public or the public in general, usually for charitable, educational, religious, or scientific purposes. Identities of the beneficiaries are uncertain.

4. Spendthrift Trust
Prevents a beneficiarys transfer of his or her right to future payments of income or capital by expressly placing restraints on the alienation of trust funds.

5. Totten Trust
Created when one person deposits money in his or her own name as trustee. Revocable at will until the depositor dies or completes the gift (for example, by delivery of the funds to the beneficiary).

C. IMPLIED TRUSTS

1. Constructive Trust
An equitable remedy that enables plaintiffs to recover property (and sometimes damages) from defendants who would otherwise be unjustly enriched. A court declares the legal owner of the property to be a trustee for parties entitled to the benefit of the property.

2. Resulting Trust
Arises when the conduct of the parties raise an inference that the party holding legal title to the property does so for the benefit of another.

D. THE TRUSTEE
Anyone capable of holding title to, and dealing in, property can be a trustee.

1. Trustees Duties
Preserve the trust property; make the trust property productive; and if required by the terms of the trust agreement, pay income to the beneficiaries.

a. General Duties
Honesty, good faith, and prudence in administering the trust for the exclusive interest of the beneficiary; invest and manage the trust assets as a prudent investor would manage his or her own assets.

b. Specific Duties

1) Keep Accurate Accounts of the Trusts Administration
Furnish complete information to the beneficiary. Keep trust assets separate from his or her own assets. Pay to an income beneficiary the net income of the trust at reasonable intervals.

2) Invest the Trust Property
Distribute the risk of loss from investments by diversification and dispose of assets that do not represent prudent investments.

2. Trustees Powers
Whatever the settlor prescribes. State law applies only to the extent that it does not conflict with the terms of the trust.

a. If State Law Applies
May restrict the investment of trust funds, confining trustees to investments in conservative debt securities.

b. Discretion to Distribute the Principal or Invest the Income
Subject to trust purposes, a trustee may make adjustments in annual distributions to provide the beneficiary with predictable income.

3. Allocations between Principal and Income
Ordinary receipts and expenses (rent, royalties) are chargeable to income; extraordinary receipts and expenses (proceeds from the sale of property, stock dividends) are allocated to principal.

E. TRUST TERMINATION
Typically, a trust instrument specifies a termination date. If the trusts purpose is fulfilled before that date, a court may order the trusts termination. If no date is specified, a trust terminates when its purpose is fulfilled (or becomes impossible or illegal).

IV. ESTATE ADMINISTRATION
The procedure used to collect and distribute assets when a person dies, subject to the oversight of a probate court. Rules vary from state to state.

A. BASIC STEPS
(1) Did the decedent leave a will? (2) Does it name a executor? If so, the court must approve; if not, the court appoints an administrator.

B. DUIES OF A PERSONAL REPRESENTATIVE

1. What to Do with the Decedents Assets
Inventory and collect them; if necessary, have them appraised; manage them during administration to avoid waste or depletion.

2. What to Do with Claims
Pay federal and state income taxes, estate or inheritance taxes, and the valid claims of creditors.

a. Federal Estate Tax
Tax on the total value of the estate (not the beneficiaries) after debts, expenses, and exemptions (including gifts to charity). The estate can pass free of estate tax if it is left to the surviving spouse.

b. State Inheritance Tax
Generally, imposed on the recipient of a bequest (not the estate). Tax rates are graduated according to the relationship between the beneficiary and decedent (lowest rates and largest exemptions are applied to a surviving spouse and children).

3. Other Duties
Post a bond, if required (the will can waive it). Distribute the estate pursuant to court Render an accounting to the court.

V. PLANNING FOR DISABILITY

A. POWER OF ATTORNEY
A durable power of attorney authorizes a person to act on behalf of an incompetent person if he or she becomes incapacitated. A health-care power of attorney designates a person to choose medical treatment for a person who is unable to make such a choice.

B. LIVING WILL
A living will designates whether or not a person wants certain life-saving procedures to be taken if they will not result in a reasonable quality of life.