C HA P T E R
1
Preparing Your
Estate Plan
The Role of Your Will
Estate planning, in simple terms, may be defined as a plan to dispose of the
property you have acquired throughout your lifetime by using the most appropriate method of transferring that property. At different times in life your
estate, family, and plans for your property will be different. Estate planning
can help accomplish a number of goals, including avoiding taxes and probate, and providing for continuing care of dependents, along with a variety
of other individual purposes. Your valid will, no matter what other methods
you use, remains one of the basic tools of estate planning. The role of your
will is flexible and addresses your personal needs at various stages of life. In
the early stages of your life your will may name guardians for dependents,
dispose of family heirlooms, or give individual gifts to children, relatives, or
charities. At later times in life, if your estate becomes extensive, your will may
dispose of property that is not transferred by more sophisticated estate planning techniques. No matter what other estate planning methods you may
use, a valid will always remains a necessary part of your plan.
Many methods allowing the immediate transfer of property outside the
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10
PREPARING YOUR ESTATE PLAN
probate process are in common use. Joint Titling with Right of Survivorship
is one method of transferring ownership that most readers are familiar with.
This common estate planning technique allows either of the co-titleholders
to assume full ownership of the property upon the death of the other. Transfers of ownership by this method make the property immediately available
and are usually exempt from tax liability and the probate process. A new
method of transferring certain monetary assets, such as bank accounts and
CDs, are Payable on Death accounts. This new method of direct transfer,
which is not currently available in all 50 states, allows the transfer of certain
accounts directly to a named beneficiary upon death of the owner. A number
of methods, including gifts made during your lifetime, trusts, and other planning measures may be required to meet your individual needs. The trend in
both federal and state legislative statutes is toward lowering taxes and simplifying the probate process. Always try to be aware of new methods of estate
planning that can help accomplish your goals.
As shown by the sample in the Introduction, your will can be a very simple document, setting out your complete plan regarding distribution of your
estate. Your will should always reflect your current goals, family needs, and
personal decisions. Your will can be amended or revoked and replaced by a
new one at any time.
Estate Concerns
You may reasonably expect to write several wills in a lifetime. The process of
writing, executing, and maintaining a will should become a routine part of
your overall estate plan. Updating your will as needed can help keep it simple, effective, and responsive to your current needs.
The passage of time can make significant changes in your personal, family, and estate situation. Your first will, often simple in content, may be supplemented, or supplanted, to take into account guardians, additional
beneficiaries, charitable bequests, or other elements of your estate plan.
Consider your estate, beneficiaries, and family needs, and plan accordingly
when deciding on the content of your will. Bequests and provisions in your
will may be as brief or extensive as needed to express your wishes and plans.
A simple will is not necessarily brief.
YOUR PERSONAL SITUATION
Assessing your personal situation is a task you are best qualified to perform. Typical concerns include your health, marital situation, and dependents; the status of your beneficiaries; and the risks involved in your daily
life. Your age and health, and that of your benef iciaries, are extremely important in shaping your estate plan. At the early stages of adult life, your as-
SPECIAL SITUATIONS
11
sets and responsibilities may be few, requiring only a simple will to transfer
your estate to your beneficiaries. At such times, your primary concern may
be to assure that your personal property is disposed of in the manner you
decide. Automobiles, household goods, jewelry, and electronic, photographic, hobby, or sports equipment may be disposed of in a valid will with
little extended planning required. In later years, after a lifetime of changes,
the same concerns often apply. The estate planning cycle often begins, and
ends, with a simple will.
Changes in your estate plan usually follow important events in your life,
including:
• Moving.
• Marriage.
• Birth or adoption of children.
• Divorce.
• Remarriage.
• Death of grandparents and others of their generation.
• Maturity of children.
• Birth of grandchildren.
• Death of parents and others of their generation.
• Growth of estate, including inheritance(s).
• Need for estate tax planning.
• Continuing health care needs.
• Death of spouse.
• Death of beneficiaries.
These events can affect the nature of your estate and influence your
choice of beneficiaries. Be sure to review your estate plan periodically and address important events that change your estate planning goals and methods.
Special Situations
At different times in life you may find that there are special situations that
affect your estate plan. These situations can include marriage, divorce, birth
of children, disinheritance, and a variety of others. Your will and common
estate planning methods may be used to address a number of these situations. Other estate planning methods, such as trusts, should be considered if
your will cannot adequately meet your goals. As changes occur in your life
your will, along with other components of your estate plan, should be kept
current.
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PREPARING YOUR ESTATE PLAN
MARRIAGE
Marriage can affect your personal goals, the ownership of property, and your estate plan. Your will, and your spouse’s, should address your shared and individual goals. The need for a will is especially critical if you intend your spouse to
inherit the majority of your estate. In most states, if there is no will to direct otherwise, your spouse may inherit only a portion of your assets. Be aware that all
states, except community property states, allow a surviving spouse to “elect”
against the will. This means that the surviving spouse can elect to receive a portion of your estate as set out by state law, instead of the bequests made under
your will. Because of the elective share statutes it is virtually impossible to disinherit your spouse. A summary of the elective share for your state can be found
in Chapter 8, State Resources and Requirements. Spouses should consult with
each other regarding estate planning so that they can prepare complementary,
not conflicting, plans. Good estate planning requires that each spouse has an
individual will that mirrors the other, and that it contains no conflicting bequests or instructions.
MARRIAGE AND PROPERTY
Marriage, of course, has a significant effect on property ownership. In community-property states, each spouse has a one-half interest in all property of
the marriage. The property interest of each spouse is individual and, if no
other plans are made, should be disposed of in the will. Property owned individually before the marriage remains separate and may also be distributed
in a will. If you live in a community-property state, be sure your will specifies
how you intend to dispose of the individual property that is a part of your estate. You and your spouse should coordinate your estate plans, and each of
you should prepare wills accordingly.
DIVORCE / REMARRIAGE / OTHER RELATIONSHIPS. Divorce and remarriage can be of special concern to those preparing an estate plan. If
you or your spouse have been married previously, be sure to check for accuracy all titles, deeds, and insurance policies acquired during the previous marriage. If either spouse has children by a previous marriage, choices
must be made regarding their place, if any, in your estate plan. For those
who are married, agreement and coordination are essential to effective estate planning.
Relationships other than marriage may also affect your estate planning
decisions. In some states, those who live together continuously for a period of time may be considered legally married, even though no formal
marriage ceremony has taken place. Common-law marriages of this type
may have significant impact on the way an estate is divided. If you or one of
your beneficiaries maintains a living relationship with someone who is not
a legal spouse, you should consider the implications carefully. States that
currently recognize common-law marriages are Alabama, Colorado, Georgia, Idaho, Iowa, Kansas, Montana, Ohio, Oklahoma, Pennsylvania, Rhode
SPECIAL SITUATIONS
13
Island, South Carolina, and Texas. The District of Columbia also recognizes
common-law marriages.
In summary, those who are currently married, considering marriage, or
maintaining a relationship that could have the legal status of marriage should
take special care when preparing an estate plan. Each spouse should have a
will, and the major provisions should not conflict or disagree. Spouses who
have named each other as sole or primary beneficiary should always name alternates to receive the estate if both die simultaneously.
CHILDREN AND DEPENDENTS
If you are responsible for the care of minor children, you should nominate
a guardian for them in your will. While your wishes are not strictly binding, the probate court usually appoints your nominee as guardian when
you express your intent in your will. Designating a person to serve as
guardian of minor children in the case of the simultaneous death of both
parents is important, and the wills of both parents should agree regarding
the designation of the contingent guardian. Close family members, including the spouse and extended family, are usually relied on to provide care
for minor children until they reach maturity. A healthy surviving spouse,
provided with adequate financial resources through insurance or estate
assets, is usually the best choice for dependent care. If you are single or
lack family resources, the importance of this type of planning becomes
more critical.
Plans for dependents, especially intentions regarding care, education, religious affiliation, and management of assets, should be outlined and discussed with your chosen guardian. The guardian you appoint must consent
and be acceptable to the court. Financial support, especially over a long period of time, may require a trust or other arrangements.
•Example
If my wife, Jo Anne Stone Light, does not survive me by more than 180 days,
then I give my entire estate to my daughter, Linda Lee Light, and my son, Paul
Abraham Light, in equal shares, and I appoint Abraham Lee Light, my father,
as guardian of my children until they attain their majority.
•
CHILDREN: UNEQUAL SHARES
If you have no will, your children—minor and/or adult, biological and/or
adopted, legitimate and/or illegitimate—may have an equal claim on your
estate. Most states also provide your unborn (pretermitted) children a share
of your estate if you die intestate. Often, parents have children with unequal
needs or have concerns about the ability of a particular child to manage assets. In later stages of estate planning, prior gifts made to children may affect the terms of your will. Providing for children requires special care as
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PREPARING YOUR ESTATE PLAN
you outline your estate plan. When children are minors or require continuing care, you may consider estate planning methods beyond your will that
provide income and financial security over time. If you have minor or adult
children that you intend to exclude from your estate or treat differently in
your will, take special care to spell out your intentions.
Your will may include special instructions regarding property left to minors. You may specify a person to hold and care for gifts of property to those
who are immature or, by law, unable to take possession.
•Example
I direct my son, Frederick Roger Hale, who is my appointed Executor, to keep
the Browning shotgun, SN 67890, that I have given to my grandson, Charles
James Hale, until he has reached maturity and is able to safely assume possession, or reaches the age of 18 years.
•
If you plan to exclude a particular child from your estate, be sure to
state that intention in your will. If you fail to mention one child while leaving gifts to others, the court may rule that you simply overlooked that
child and may award him or her a share proportionate to those of your
other children. Be sure provisions regarding children are clear, complete,
and direct.
•Example
I have purposely made no provision for my son, William Samuel Stull, because I have neither seen him nor heard from him in the past 30 years.
•
Be sure to list the reasons for unequal treatment of your children in your
will. Unequal division of your estate can often result from prior gifts or loans
made to your children.
•Example
I give my entire estate to my son, James Carl Stull. I have intentionally made
no provision for my other son, Howard Charles Stull, since I previously purchased an 80-acre farm in Pasco County, Florida, for him in accordance with
his expressed wishes.
•
Making unequal provisions in your will should always be planned carefully. Children who are treated unequally, or who are excluded from your
will, are likely to contest the will.
COMMON ESTATE PLANNING METHODS
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DISINHERITANCE
Disinheritance usually applies to immediate family members (an only
child, for example) who would have a claim on your estate if you had no
will or if your will were declared invalid. Note that Louisiana is the only
state in which you cannot disinherit your children. If you disinherit an immediate family member, it is always wise to state your reasons for doing so
in your will. In most other cases, you may effectively disinherit anyone
other than your named beneficiaries by simply not including them in your
will. If you wish, you may also include a statement in your will specifically
omitting all others.
•Example
I hereby specifically exclude from my estate any and all other persons not
named previously in this, my Last Will and Testament.
•
CAUTION: Completely disinheriting your legal spouse is virtually impossible. In any case, your spouse will be able to take an elective forced share
of the estate. Remember, disinheriting a close family member can cause controversy in your family. Family members who feel that they have been unfairly disinherited are the source of most will challenges. If you have reason
to believe that someone will contest your will, recognize that he or she will
probably engage an attorney, and take special care when preparing your
will. A properly executed (signed and witnessed) will is very difficult to challenge successfully.
Many of the special situations encountered at different stages of estate
planning may be addressed with simple provisions in your will. Evaluating
your personal situation and your goals is necessary to determine if additional
estate planning measures are needed. If continuing care of dependents, conservation of assets for future generations, or estate taxes are a concern, you
should consider a trust or other arrangement. Health and medical expenses
are also concerns that can affect estate planning decisions.
Common Estate Planning Methods
The Living Will and Power of Attorney, which can be used as methods to
address concerns related to continuing care and conservation of assets,
are discussed in more detail in Chapter 7. In the following section, estate
planning methods including Payable on Death accounts and Joint Titling
with Right of Survivorship are summarized. A detailed overview of Trusts is
also presented.
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PREPARING YOUR ESTATE PLAN
PAYABLE ON DEATH ACCOUNTS
The Payable on Death (POD) account is a simple estate planning tool that
has recently become available in many states. Checking and savings accounts, along with certificates of deposit, may be designated as Payable on
Death accounts. The owner of a Payable on Death account simply designates
a beneficiary to receive the account upon the owner’s death. These accounts
are transferred outside the probate process and are immediately available to
the named beneficiary.
To establish a Payable on Death account, simply ask your banker to
open or designate the account as a POD account. Your banker will ask
for the name of the beneficiary who is to receive the account upon
your death. The name of the beneficiary you designate, along with the letters P.O.D., are then typed on the account documents. Once this is completed, the account will go directly to your designated beneficiary upon
your death.
This simple method of designating a beneficiary has some advantages
over the traditional method of joint titling (with right of survivorship) such
accounts. A major advantage is that your ownership interest in the account is
not compromised while you are living, as it is with a jointly titled account.
Your bank or financial institution can tell you if your state has Payable on
Death accounts or a similar statute. POD accounts allow the named beneficiary to claim the balance of any accounts immediately upon the death of the
account owner. POD accounts are, by law, exempt from the probate process.
The states having Payable on Death accounts are listed in Chapter 8, State Resources and Requirements.
JOINT OWNERSHIP / RIGHT OF SURVIVORSHIP. Joint ownership, with
right of survivorship, is a common estate planning technique used by married couples, as well as by others who own property together. Property held
in joint ownership transfers title to the survivor upon the death of one of
the owners. This type of transfer is automatic and avoids probate of the
property. Real estate, bank accounts, and other property are often jointly titled by couples as an estate planning measure. Be sure to review deeds, titles, and account agreements that are titled jointly to ensure that “right of
survivorship” is included. Joint owners may plan for the remote possibility
of simultaneous death by naming an alternate beneficiary in their wills. If
both partners die together and their wills agree on an alternate beneficiary,
that person will receive the property once held jointly by both. For this reason, it is extremely important that spouses’ wills agree on major provisions,
especially the choice of alternate beneficiaries and Executor. In some states,
a form of real property ownership, “tenants by the entirety,” is available to
married couples only. This type of ownership also transfers title automatically to the remaining spouse.
PURPOSES OF TRUSTS
17
Trusts
Many techniques of estate planning can be set up with little or no outside
help. For example, tax-deductible gifts of up to $10,000 each may be made to
children and grandchildren each year by each parent. The preparation of a
will; joint titling of real estate and accounts, with a specified right of survivorship; and payment of life insurance policy proceeds to a named beneficiary can all be arranged easily, without ongoing outside assistance being
required. A trust, however, requires the services of a trustee, who is empowered to oversee the operation of the trust, in accordance with the guidance
contained in the basic trust agreement. Since a trust cannot be effectively
used for estate planning purposes without outside assistance, the following
material is intended to provide a general overview of trusts so that the type
of trust needed can be identified. After review of this material, it is suggested
that the components of the trust desired be listed in outline form to provide
an informed basis for proceeding with outside assistance. The Trust Checklist at the end of this chapter is provided for this purpose.
A trust is simply defined as giving assets or property to one party (a
trustee) to hold, use, or manage for another party (the trust beneficiary). A
trust is legally established by the witnessed and notarized execution of a declaration of trust by the creator of the trust (also called the settlor, grantor,
trustor, or donor). The trust agreement empowers the trustee to administer
the trust and sets out its terms and conditions.
TRUSTS AND LIFE ESTATES. Trusts and life estates are options that can offer many advantages and may be considered as part of your estate plan.
Trusts are often used to provide income to a surviving spouse or other beneficiaries while the assets of the trust are conserved for future distribution.
There are several types of trusts and methods of establishing them to
achieve different purposes. You and your spouse should discuss your goals,
tax position, and anticipated income needs when considering trusts. A life
estate can guarantee your spouse or other beneficiary the right to occupy
real property, such as a house or farm, while allowing the title to be transferred to another beneficiary. Title transfers prior to death avoid probate
and, because a life estate is a liability against real property, may lower the
value of the taxable estate.
PURPOSES OF TRUSTS
Reasons for establishing a trust include:
• Providing for continuing care and education of minor children (or
grandchildren).
• Providing income for a surviving spouse.
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PREPARING YOUR ESTATE PLAN
• Providing for continuing care of a dependent or incompetent adult.
• Providing the assistance and the security of professional management
of assets.
• Minimizing federal estate taxes if the combined estate (of husband
and wife) will exceed $675,000 upon the death of the surviving
spouse.
• Minimizing state inheritance taxes.
• Avoiding the expense, delay, and public record involved in the probate
process.
THE TRUST ENTITY
The establishment of a trust creates a separate legal entity, the trust, which
has ownership and/or title of property transferred to it. As a separate legal
entity, the trust must be given a Federal Employer Identification Number
(FEIN), and separate state and federal income tax returns must be filed if the
trust’s income exceeds $600 annually. Generally, the trust holds title to all its
assets, is managed by a trustee, and is owned by the beneficiary(ies). Functionally, a trust is very similar to a private investment corporation. The
trustee should keep accurate accounts and report on the trust’s status to the
beneficiaries (owners) on a regular basis.
THE TIMING OF TRUST DISTRIBUTION
The reasons for establishing a trust affect its terms. An arrangement suitable
for one stage of family life, addressing care of minor children in the event of
the death of one or both parents, becomes functionally obsolete when the
children reach adulthood and are presumed capable of managing their own
affairs. A trust to pass on family real estate to the next generation may be established whenever circumstances warrant it. Establishing a trust to provide
a source of funds for the continuing care of a spouse or relative who has, or
may have, medical problems is often a concern in later life. Tax planning reasons for establishing a trust are directly related to the present and anticipated value of your estate.
A trust can be structured to pay all, or a portion of, the trust principal to
the trust beneficiary(ies) at various times, either on specific dates, such as
birthdays, or over multiyear periods.
Examples of timing trust principal distribution include:
• All of the principal to beneficiary(ies) on January 1, 2000.
• Each beneficiary’s principal to be paid in full upon his or her twentyfifth birthday.
THE FUNDING OF TRUSTS
19
• Beneficiary to receive one-third of the principal 10 years from the date
of the trust agreement, one-half of the remaining principal 5 years
later, and the balance of the principal 20 years from the date of the
trust agreement.
1
10 years
/3
1
2
1
15 years ( /2 × /3)
/3
1
20 years (balance)
/3
• All to beneficiaries upon sale of trust assets, per trust agreement.
When the principal balance of the trust is fully paid to the trust beneficiary(ies), the trust is terminated.
Trusts can be established on either a revocable or an irrevocable basis. An
irrevocable trust cannot be changed, whereas a revocable trust can be terminated at the trustee’s discretion. At present, there are no federal income or
estate tax advantages to a revocable trust.
THE TRUSTEE
Clearly, the person or organization chosen as trustee has a significant bearing
on how the trust is structured. If a third-party trustee, either an individual or
an organization, is appointed, the trustee should be bonded in the amount
of the trust to protect the interests of the beneficiary(ies). Compensation of
the trustee for investment, management, disbursement, and state and federal
tax filings should be established and agreed on before a trust is set up. Thirdparty trustee fees vary with the size, term, and complexity of the trust, and it
is wise to obtain several quotes. If the trust has a relatively long term, it is
also desirable to select an alternate trustee to serve in case the first trustee
becomes incapacitated or is otherwise unable to serve.
Trusts can be organized either as “living” trusts (inter vivos trusts) or as
“testamentary” trusts (established upon death). If you set up a living trust,
you can also be the trustee. Generally, a revocable trust is preferable if you
plan to act as the trustee or wish to assess the performance of a third-party
trustee.
THE FUNDING OF TRUSTS
Living trusts are funded with wholly owned assets such as cash, stocks,
bonds, and real estate. A testamentary trust can be funded with wholly
owned assets or life insurance policy proceeds. The initial funding of a
trust is its principal. Funds earned from the trust principal, such as interest, dividends, and rents, are considered as trust income. Many trusts are
designed to preserve the principal until termination, with the trust income being distributed to the trust beneficiaries in a timely manner for
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PREPARING YOUR ESTATE PLAN
their benefit. In other cases, the trust may be structured to reinvest all income, thereby creating a larger principal balance to be paid out when the
trust is terminated.
If the trust is funded with real estate, you may also grant a lifetime-use
provision for a spouse or others, particularly if they are not to be beneficiaries of the trust upon its termination. This is accomplished by adding a life
estate interest clause to the deed of the property involved before its transfer
to the trust. A beneficiary of a trust has vested ownership in all, or part of, the
trust principal and income. Unless otherwise specified, ownership of a trust
interest is an asset to the owner and, as such, can become a part of the
owner’s estate.
TRUST CHECKLIST
21
Trust Checklist
PURPOSE(S) OF TRUST
_________
Continuing care/income.
_________
Maintenance of ownership.
_________
Timed distribution of assets.
_________
Privacy/avoiding probate.
_________
Tax considerations.
TYPE OF TRUST
_________
Testamentary trust.
_________
Living trust (inter vivos).
NATURE OF TRUST
_________
Irrevocable.
_________
Revocable.
TRUSTEE
_________
Third party.
_________
Self/owner(s).
TRUST ASSET(S)
_________
Real estate.
_________
Stocks/bonds.
_________
Cash.
_________
Income-producing asset(s).
(continued)
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PREPARING YOUR ESTATE PLAN
Trust Checklist (continued)
SOURCE OF TRUST ASSETS
_________
Lifetime transfer(s).
_________
Estate.
_________
Life insurance proceeds.
TERM OF TRUST
_________
Years.
TRUST OWNERS/INCOME BENEFICIARY(IES)
____________________________________________________________________.
____________________________________________________________________.
____________________________________________________________________.
____________________________________________________________________.
TIMING OF TRUST DISTRIBUTION
Income ____________________________________________________________.
____________________________________________________________________.
____________________________________________________________________.
Principal/Asset(s) ____________________________________________________.
____________________________________________________________________.
____________________________________________________________________.
Date _____________________________
