What is a will?
A will is any written document in which the maker states his or her intention to devise or bequeath his or her real or personal property at death. For a will to be legally enforceable, it must conform to the specific legal requirements of the state in which it is created.
The important features of a will are as follows:
· A will must be prepared and executed with the formalities required by the laws of the jurisdiction in which it is created.
· A will takes effect only on its maker’s death.
· A will affects only assets which are owned by the maker alone and which do not pass to others by the operation of law or by contract (joint tenancies and beneficiary designations).
Is a will the best way to plan my estate?
There are many advantages and disadvantages to planning your estate with a will. Whether the advantages outweigh the disadvantages is a function of many personal factors: the size and complexity of your estate, the degree to which you want to ensure that your assets will, in fact, be transferred to the individuals you choose in the manner you choose, the value you place on privacy, and the importance of minimizing taxes, costs, and attorney’s fees.
· What are some of the advantages of a will?
The most significant advantages of will-based planning include the following:
1. Wills avoid intestacy. If a person dies without a valid will (or funded living trust), all of that person’s probate assets will be transferred by the laws of intestacy. State intestacy laws vary considerably depending on whether the decedent is survived by a spouse, the number of children surviving the decedent, and so on. Generally speaking, however, all intestacy laws, in varying degrees and percentages, seek to provide for the decedent’s spouse, children, parents, and then more remote relatives. If no individual entitled to inherit the decedent’s estate is found within the time prescribed by state law, the property will revert (escheat) to the state.
Thus, the primary advantage of having a will is that it permits distribution of your probate estate pursuant to your wishes rather than the state’s wishes.
2. Wills permit the nomination of a personal representative and a guardian for minor children. In addition to identifying who will receive your probate assets, a will allows you to nominate your personal representative (often referred to as your executor if a male or executrix if a female). If you do not name a personal representative, the probate court will appoint an individual (often a close family member) who may or may not be the individual you would have chosen.
In a similar vein, a will permits you to name a guardian or guardians of your children. For most people, choosing a guardian of their minor children is a carefully reasoned decision and one that is best made by the parents and not the court.
3. Wills are easily implemented and maintained. In most instances, creating a will is an uncomplicated event. While certain individuals wish to handwrite their own wills (called holographic wills) or use one of the many forms or computer software applications available to the public, most individuals engage the services of an attorney to ensure that their wills conform to the peculiarities of local laws.
Moreover, as attorneys become more technologically advanced, there is decreasing reliance on amendments, or codicils, to wills. Rather, once your will is part of the attorney’s electronic files, the attorney often simply incorporates your intended changes directly into your will, reprints the document, and has you execute a new, updated will.
4. Wills can provide maximum tax savings, protect your children’s inheritance from their creditors, and/or establish trusts to “ease” children into their inheritance. In theory, a “complex” will can provide many of the advantages found in a living trust—based estate plan. In fact, from a legal perspective, the actual language found in a complex will can be almost identical to the trust language of a living trust. Separate trust shares can be created for the benefit of a surviving spouse in an attempt to minimize or eliminate federal estate taxes, and separate subtrusts can be established to provide for the needs of children and loved ones.
· What are the primary disadvantages of wills?
The one overreaching caveat regarding wills is that although in theory they may provide tremendous advantages, in practice their usefulness and effectiveness often fall far short of the theoretical optimum. While wills can be effective planning tools for smaller estates, the more complex a person’s affairs are, the less effective a will is in planning the estate. Here are some of the major shortcomings of wills:
1. Wills often fail to control a great deal of the maker’s property. The greatest disadvantage of planning your estate with a will, especially if you have a larger, more complex estate, is that your will may fail to actually control the distribution of much of your property. A will controls only the property that is part of your probate estate. Your probate estate includes:
· All property that is titled in your individual name and does not have a beneficiary-designation clause
· All property that is payable to your estate or subject to a power of appointment
· Your share of any tenancy-in-common property that you own
A will cannot control your joint tenancy assets; they pass automatically to the surviving joint tenant. Nor can your will control assets such as certificates of deposit, individual retirement accounts, Keogh plans, and life insurance for which you have named your spouse, children, or other loved ones as beneficiaries.
2. Wills offer no protection against conservatorship of the maker. While a will can effectively appoint your personal representative and the guardians of your minor children, it cannot name or appoint an individual to protect you or handle your affairs in the event of your disability. Quite simply, your will is ineffective until after your death. Hence, should you become disabled, your financial affairs may well become subject to your state’s guardianship or conservatorship proceedings.
3. Wills do not easily cross state lines. In order for your will to transfer the property that makes up your probate estate, it must be filed with the court in the state and county of which you were a resident at your death. While a will executed in one state is valid in another state, it will nonetheless be interpreted according to the laws of the state in which you were domiciled at your death. For example, if your will does not contain a specific clause directing that taxes be apportioned among a certain class of beneficiaries, state A may assess tax liability against each beneficiary according to the amount received by the beneficiary and state B might assess all tax liability against the “remainder” of your estate. Thus, unwittingly, by moving from state A to state B, you could shift the entire tax burden of your estate from each of your beneficiaries to just a select few who were named the recipients of the balance, or remainder, of your assets. Wills are not very portable from state to state.
4. Wills are filly public. Despite the fact that most people are reticent to discuss their financial affairs in public, give their latest income tax return to a stranger, or discuss their net worth or cash-flow difficulties at a cocktail party, a person who dies leaving a will to transfer his or her assets may well be exposing this very information. Quite simply, a will, all accompanying inventories, tax returns (in some states), statements of assets and liabilities, the identity of your beneficiaries, the amounts they receive, and the manner in which they are to receive your legacy typically may be filed with the probate court and open to public inspection.
No doubt, the late Jackie Kennedy Onassis had some of the finest lawyers prepare her estate planning documents. Nonetheless, because a will was the cornerstone of her estate plan, it took only a simple drive or a phone call to the courthouse to obtain a complete copy of all such information, and it was a top story on the news.
Your privacy cannot be maintained under a will, and the financial condition of your family and business can be open for inspection by anyone.
5. Wills ensure probate. Any asset controlled, disposed of, or transferred by a will must go through probate. Many believe that just having a will (or, more often, their particular will) avoids probate, but this is impossible. If your will is used to transfer any of your property, it must first be submitted to the probate court and then be administered in accordance with each and every rule inherent to your state’s probate code.
6. Wills are easily challenged. Probate of a will provides an open door for any disgruntled heir to challenge the terms of the will.
· Can you give me an example of what you mean when you say that a will does not control all my property?
Consider Mr. Smith. Mr. Smith, age 57, is married and has two children, ages 17 and 22. He and his wife have a gross estate for federal estate tax purposes of $1,592,000, of which $1,118,000 is deemed for tax purposes to be owned by Mr. Smith.
For the purposes of this example, we assume that Mr. Smith made an appointment with a respected attorney and received a complex will that contains tax planning trust provisions for his wife and creates trusts for his children which, upon his wife’s death, are designed to retain the remaining principal in trust until each child reaches the age of 35.
· Mr. Smith signed his will with great peace of mind, confident that his affairs were finally in order. Assuming that Mr. Smith passes away and is survived by his wife and two children, what does his will control?
Unfortunately, Mr. Smith’s will controls only the disposition of his automobile and personal property valued at $54,000! His one-half interest in the family residence, his stocks and bonds, checking account, and artworks will all pass automatically to Mrs. Smith because she is the surviving joint owner. The cabin in the mountains will pass not to Mrs. Smith or to the Smiths’ children but to Mr. Smith’s brother, despite the fact that Mr. Smith did not name his brother as an heir in his will.
Mr. Smith’s certificates of deposit, life insurance proceeds, and IRA will pass to Mrs. Smith, not by virtue of his will but by the beneficiary-designation clauses naming Mrs. Smith as primary beneficiary.
In total, not accounting for court costs, attorney fees, or taxes, Mrs. Smith will receive $1,018,000 in assets from Mr. Smith (all of his assets except for the cabin, which went to his brother), yet only $54,000 pursuant to his will. At first blush, the fact that the will did not control $1,064,000 of Mr. Smith’s assets may seem moot because Mrs. Smith did receive the majority of the property her husband intended. Such a cursory conclusion is flawed.
Mr. Smith’s will had federal estate tax planning provisions which sought to hold all assets for the benefit of Mrs. Smith during her lifetime, while paying her the income and, if needed for her health, education, maintenance, and support, the principal as well. By creating such a trust, the will was designed to prevent the assets from being included in Mrs. Smith’s taxable estate upon her death. Nevertheless, as Mr. Smith’s will failed to control most of his property, $1,018,000 was transferred outright to Mrs. Smith. Since Mrs. Smith already had assets of her own valued at $474,000 for tax purposes, her taxable estate now totals $1,492,000. If Mrs. Smith were to die in 2006 or later, this would generate a federal estate tax of $206,560. If Mrs. Smith lives for several years after Mr. Smith’s death, the appreciation in the value of her estate could cause a much higher federal estate tax liability and added probate costs.
Now let us assume the same set of facts except that Mrs. Smith predeceases Mr. Smith. Her one-half interest in the joint tenancy property passes by law to her husband, thus altering Mr. Smith’s federally taxable estate.
Now what does Mr. Smith’s will control? It still fails to control a great deal of his property, and thus his intended estate plan will not be fully implemented. First, the cabin in the mountains will still pass to his brother, not his children. Second, $490,000 of his estate (again without taking into account taxes, court costs, and attorney’s fees) will be transferred outright to his two children as a result of their being listed on beneficiary designations. These assets will not be held in trust for the children until they reach age 35, contrary to Mr. Smith’s intentions. Moreover, if Mr. Smith dies while his youngest child is still a minor, a guardian will have to be appointed to receive that child’s one-half share of the $490,000 passing outside of Mr. Smith’s will. If Mr. Smith dies in 2006 or later, the federal estate tax due will be $251,400. Properly planned, the Smith estate could have been structured to avoid most, if not all, federal estate tax and probate fees.
Accordingly, if your estate planning goals are to minimize federal estate taxes, court costs, and attorney’s fees, to protect your legacy from your children’s creditors, or to ensure that your children receive their inheritance when they are mature and not simply of “legal age,” but your estate includes assets that are owned in joint tenancy or controlled by beneficiary designations, then you need a comprehensive estate plan that controls your property in a way that will accomplish your goals.
· Is it true that if I have a will my estate will not be subject to probate?
If you own property in your name when you die, no matter how clearly you may set forth your desires in your will, your will guarantees that a probate proceeding will be necessary. Every state has laws which affect the timing and manner in which your assets are distributed, and nothing you say in your will can avoid those laws.
· Won’t a will satisfy the definition of estate planning?
The definition of estate planning that is used by the National Network of Estate Planning Attorneys is:
I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.
Let’s take a look at this definition of estate planning and see how a will stacks up.
A will does allow you to control your property while you are alive and able to do so. A will can do nothing to protect you if you are incapacitated; a will is effective only upon your death.
Does a will actually control property at death? It controls only the property that is not titled in joint tenancy or governed by beneficiary designations.
As far as giving your property to whom you want, the way you want, and when you want, the only thing a simple will can do is give property outright, which may not be in the best interest of the beneficiaries. Often it is not. In order to meet these objectives, your will would have to include one or more testamentary trusts and make sure there is no property titled in joint tenancy or passed through beneficiary designations.
As far as avoiding court costs such as probate, a will does not avoid them. A will guarantees probate as to the property it controls, so it also guarantees that there will be professional fees such as those for attorneys and appraisers. Only a will with testamentary trust provisions will provide any type of tax planning or tax savings; but such a will would have the added disadvantage of requiring continued court supervision and control until all purposes of the testamentary trust have been satisfied. For example, the court will often require the filing of annual, or more frequent, accountings that are available for public inspection.
As you can see, a will, in almost all respects, falls short of meeting the definition of proper estate planning.
· Does my will take care of transferring property that I have in another state?
Generally, states will recognize as valid a will admitted to probate in another state. However, this does not mean that real property outside your home state will automatically transfer according to the terms of your will. Instead, a process known as ancillary probate or ancillary administration is required. Although another state will recognize and accept the beneficiary you have named, each state can determine the method and requirements for transferring real property located within its borders. Ancillary administration is a probate procedure which requires the filing of documents in the probate court of the state where the real property is located. Going
through ancillary administration amounts to probating the will twice but under different requirements depending on the states involved. Sometimes taxes must be paid on the value of the property before it can be transferred to the beneficiaries.
In most instances, ancillary probate proceedings require that an attorney in the ancillary state be retained, and if the executor of the estate is not a resident of that state, he or she may be required to post a bond with the court. Needless to say, ancillary probate involves additional costs and fees, leaving even less for loved ones.
· I have homes in two states, and I spend a considerable amount of time in both. I understand that this can cause tax problems. What should I know?
Although you may have more than one residence, you technically have only one “domicile.” It is important to determine which state is considered your domicile, because it is the law of that state which will control the operation of your estate plan and the taxation of your estate. Sometimes, by putting certain language in your estate planning documents, you can select the law of another state to control the operation of those documents in order to obtain more favorable results; your advisors can assist you with the details.
The indications of domicile in a state include the following:
· You vote in that town and state.
· You spend more than half the year in that state.
· You have your major religious and other community and social activities in that state.
· You have a driver’s license for that state, and you have a car registered there.
· You file an income tax return in that state.
If it is not clear from the above indicators which of the two states is your domicile, it is important that you make an informed decision and develop facts and circumstances to support your domicile in the state which you choose. Otherwise, both states may consider themselves your domicile and impose state death taxes on your estate.