17 Apr

Wills: Everything You Ever Wanted to Know

Guardianship, Taxes, Trusts, Wills, April 17, 2016

Wills: Everything You Ever Wanted to Know

Before we get going I want to warn you: this is going to be long.

And, by the way, if you ever ask yourself “do I need an estate planning lawyer to put together my will?” then this post will probably demonstrate, at least a little, why the answer to that question is “yes.”

This post is intended to be useful for everyone. If you just want to scan through and see the highlights, there are highlights. If you want to get in the nitty gritty and put your estate planning attorney hat on, you can do that too.

At the end of the day, I am a firm believer that knowledge is power. The more you know the more informed your decisions will be, the more thought out your decisions will be, and the better your decisions will be.

1.0 – Wills: What Are We Talking About?

Before we get going let me give you a quick run down of what we’re going to be talking about, that way you can scan down and find what you are looking for if you are looking for something specific.

1.1 – An Introduction to Wills

  • Why should most adults have a will?
  • Advantages of an estate administration proceeding;
  • Disadvantages of joint of contractual wills;

1.2 – Organization and Content of Wills

  • General outline of a will;
  • Introduction to will;
  • Revocation of all prior wills;
  • Disposition of remains;
  • Payment of debts;
  • Extent of testator’s property;
  • Family status and definitions;
  • Gift of specific item of personality;
    1. Ademption;
    2. Alternative disposition;
    3. Simultaneous death;
    4. Survivorship for a specified period;
  • Cash gifts;
  • Tangible personal property;
  • Disposition of tangible personal property in accordance with testator’s subsequent directions;
  • Gift of corporate securities;
  • Gift of residence, life insurance, and employee benefits;
  • Residuary gift;
  • Trust provisions;
  • Trust for minors;
  • Provisions applicable to all trusts;
  • Guardian of minor children;
  • Executors;
  • Directions regarding debts, expenses of administration, and taxes; conservation easement;
  • Wills not pursuant to contract;
  • No contest clause;
  • Execution;
  • Self-proving affidavit;
  • Execution ceremony; and
  • Letter of transmittal to client.

1.3 – Additional Documents

  • Generally;
  • Durable powers of attorney;
    • Creation, recordation, and revocation;
    • Durable power of attorney for health care;
    • Limitations;
    • Springing Powers;
  • Health insurance portability and accountability act (HIPPA);
  • Living will, advance directives, and natural death acts;
  • Death with dignity, continuing evolution; and
  • Anatomical gifts; uniform anatomical gifts acts;

Whew! And to think, that was just the outline!

A couple of things to remember about this article:

  1. This is written by an estate planning attorney for normal people to read – that means I’ve left out the super complicated technical parts and just given you the general rules.
  2. Don’t try this at home! I’m not a surgeon so I wouldn’t try to operate on a heart. If you aren’t an estate planning attorney don’t try to create estate plans – especially when there is so much at stake (i.e. your family’s financial future).

Now, let’s get to it!

2.0 – Overview of Wills

2.1 – Why the heck do you need a will anyway?

In today’s day and age a lot of your property will pass outside of the confines of your will. Things like:

  • Inter vivos (living) trusts;
  • retirement plans;
  • life insurance policies;
  • joint tenancies;
  • transfer on death designations; and
  • other will substitutes.

But that doesn’t mean you should have a will.

Consider a will as backup protection.

If you mess up and forget to name anyone for the above will substitutes or someone is no longer around to be the beneficiary, a will makes sure your stuff goes to the right people.

A will also performs some functions that can’t be carried out anywhere else.

A will, and no other instrument, can be used to:

  • Disinherit children in favor of a spouse or otherwise deviate from the local intestate succession laws;
  • Appoint guardians of the person and estate of minor children;
  • Consolidate assets into trusts for management;
  • Exercise testamentary (after life) powers of appointment;
  • Tell your executor how debts and death taxes should be paid;
  • Achieve income and transfer tax savings by giving survivors limited interests in testamentary trusts;
  • Distribute life insurance proceeds if the named beneficiary died before the testator (the person who’s will is being reviewed);
  • Specify what happens in a simultaneous death situation.

Washington Tip: The Super Will

In Washington State it is possible to distribute your non-probate assets (life insurance, etc.) via a will, BUT you have to do some very specific things.

The way to do this is called a super will.

If you specifically refer to a nonprobate asset and name a beneficiary in this super will, the insurer or financial institution would comply.

The thing is, it’s really easy to make sure your beneficiary designations are up to date, and that’s the easiest way to make sure the people you want to get your assets get them.

2.2 – Avoiding Intestacy

One advantage of having a will is that you avoid the intestacy laws. Intestacy laws are the rules set up by state governments to distribute property of people that die without a will.

Why is this important?

First, administering the estate of someone without a will can take longer. That means there is more time that family will have to wait before getting access to assets they may need to continue with their lives (to pay the mortgage, bills, groceries, etc.).

Second, administering the estate of someone without a will can be more expensive. An estate planning attorney will often have to be involved, as well as other court appointed representatives. All of those people have to get paid.

Third, and finally, if you don’t have a will you don’t get to choose how your assets are actually distributed.

The order of distribution usually goes like this (and if one doesn’t exist for you simply move on to the next);

  1. Spouse (all community property; 1/2 of separate property);
  2. Kids (if spouse living, 1/2 of separate property);
  3. Parents;
  4. Siblings;
  5. Aunts/Uncles;

See anyone that might be missing? How about:

  • Loved ones you aren’t related to;
  • Boyfriends/girlfriends;
  • Other relatives not in line;
  • Caregivers;
  • Charities;

A will allows you to distribute your assets the way you want.

2.2.1 – What is Community Property and Separate Property in Estate Planning?

For more information on community property, check out this blog post I wrote about it:

Community Property and Estate Planning

Separate property is everything else.

2.3 – Probate May Protect Survivors’ Economic Interests

One quick note here on probate in general.

For the most part, people hate probate. I think that’s an idea planted in people’s heads by estate planning lawyers so they can sell them more expensive estate planning tools.

Probate can actually be helpful in some respects.

A major protection probate gives survivors is freedom from creditors after a certain amount of time has passed. Without probate there is a real possibility that creditors’ claims could linger on and on.

2.4 – Income Splitting Between Estate and Survivors

The interesting and fascinating thing about estate planning is there are all of these little nuances that you just don’t think about until you are in the thick of an estate proceeding.

For example, if someone dies without a will and estate administration proceeding, any income earned by property of the decedent will be taxed to the beneficiary.

Here’s a quick example: let’s say you die and you own a rental home. You have it set up so the rental home simply passes directly to your sister when you pass. In that scenario your sister would immediately be responsible for any income taxes related to the rents paid on that house. With an estate administration, some of that tax burden can be reduced or eliminated altogether.

2.5 – Contractual Wills

First things first, here, contractual wills are a bad idea. Don’t do them.

Now, a contractual will is essentially an agreement between parties that they won’t change their will once the other person dies. This is meant to ensure both party’s wishes under the will are carried out.

For example, husband and wife each create a will. They decide they are going to leave everything to each other and then leave the rest to their kids. But, they are concerned that after the first one dies the other may get remarried and change the will, potentially leaving the kids out. So they create an agreement that they won’t modify the will.

Sounds good in theory, but there are a bunch of problems with it. Here are just a couple.

  1. They are hard to enforce; and
  2. It creates huge potential estate tax problems.

If you are concerned about something like this, use a trust instead.

3.0 – Wills: Organization and Contents

Wills typically contain a series of articles that:

  1. Identifies the testator and members of their family;
  2. Revokes earlier wills;
  3. Defines terms;
  4. Disposes of the testator’s property;
  5. Appoints fiduciaries including guardians and trustees;
  6. Spells out the powers of the fiduciaries;
  7. Gives a place for testator and witnesses to sign.

Some wills will also include a chart showing how assets are to be distributed.

Some wills also contain a table of contents summarizing what each article does.

Introduction to Will

I, John Q Client, also known as John Quincy Client, a resident of ____________ (city), __________ (state) declare this to be my will.

The introduction serves two purposes:

  1. Indicate all of the names of the testator to make it easier to track down property; and
  2. Establish the place of residency.

Residency is important because the state of residency is often the state that controls the overall administration of an estate.

It can also be very important for tax purposes. For example, if your residence is in Washington State any assets you own over two million dollars will be taxed at twenty percent. If you are not a resident of Washington but only own property here, only that property will be taxed at the twenty percent rate, and you will owe no tax at all if that number is under two million dollars.

What about having an introduction that is more elaborate and lawyerly sounding?

That’s all for show.

3.2 – Revocation

Article 1: I revoke all wills and codicils previously made by me.

A new will that disposes of all property revokes an old will if it is inconsistent with the new will.

Adding this provision into a will simply makes it obvious and straightforward that all previous documents are to be ignored.

Why might one NOT want to include a revocation clause? If the testator was believed to be near death and wanted to give money to charity, one might not want to revoke that bequest in the old will to keep the charitable gift intact (in some cases a period of years has to pass before the bequest would be valid).

3.3 – Disposition of Remains

Some wills include directions regarding funeral arrangements and the disposition of remains.

Ours does not.

Instead, we create a separate document outlining those wishes. It makes accessing the documents easier and ensures the testator’s wishes will be followed (some families will not look at the will until after the funeral).

3.4 – Payment of Debts

Some wills include a direction that “my executor shall pay all of my just debts as soon as practicable after my death.”

I believe that language should not be in a will. It can do more harm than good and create opportunities for people with debts that missed their deadline to get paid to argue their debt is still outstanding.

3.5 – Extent of Testator’s Property

This provision can be important if a husband and wife have had contact with a community property state (like Washington).

In a community property state a husband and wife could have both community and separate property. Taking the time to specifically identify which property is of which type can help to make a final determination.

This is most often important if the testator is leaving a significant portion of his separate property to someone other than his spouse (if you want to know why maybe I’ll write another blog post or you can just call me).

3.6 – Family Status and Definitions

Article 2: I declare that I am married to Jane Martin Client (“my wife”) and that I now have three children, Karen Ann Client (born August 1, 1978), Samuel Martin Client (born April 15, 1982), and John Rogers Client (born November 7, 1985). References in this will to “my children are to them and any children later born to or adopted by me.”

The term “descendants” refers to all naturally born or legally adopted descendants of all degrees of the person indicated.

It is prudent to define “children” and “descendants” so that everyone knows what you are talking about. Otherwise the court will have to rely on the definition supplied by the legislature.

This section also helps to set the table for any future references to “my wife” or “my children.”

This would also be an appropriate time to exclude anyone you did not want to be included in one of these classes.

Also an important note: the word “heirs” should not be used here. It is not specific enough and should not be used in order to avoid any lingering possibility that the Rule in Shelley’s Case or the testamentary branch of the Doctrine of Worthier Title might be applied to gifts made in the will.

3.6.1 – What about a posthumously conceived child?

Technology now allows a child to be conceived after the death of one, and even both, of the individuals who create a child.

In most states the status of a child born under these circumstances is unclear. And courts have decided this issue both ways.

The easiest way to avoid any confusion is to, if you anticipate the problem arising, be as clear as possible about your intentions.

3.6.2 – What About Frozen Sperm or Eggs?

Again, the status here is unclear.

What is not unclear is that if you are specific about your intentions the court is likely to follow your direction (particularly in a situation like this where your sperm is technically your property).

3.7 – Gift of a Specific Item of Personalty

Article 3: I give my antique mahogany desk by Samuel McIntyre to my friend Archibald Jones if he survives me. However, if the desk is not a part of my estate at the time of my death for reasons other than an inter vivos gift to Archibald Jones, I give him the sum of Five Thousand Dollars ($5,000) in place of the desk if he survives me. If Archibald Jones does not survive me no property shall pass under this Article.

A couple of things to remember here.

First, it is important to state whether or not you want the gift to remain in effect if the person you are giving the gift to dies before you.

This is important because in some circumstances if the beneficiary of the property dies the property you gave them would pass to their children. If you don’t want this to happen it’s best to be clear about it.

Second, it is important to consider whether or not the beneficiary would receive anything if the specific property you were giving them wasn’t your any more.

Finally, one may want to consider specifically excluding any items mentioned here from Article 5, which we’ll get to in a moment.

3.7.1 – Ademption

Ademption is the concept that if you say you want to give a specific item to someone and that item doesn’t exist at the time of your death that person gets nothing.

Some states have this as the general rule and others don’t.

The easiest way to prevent or create ademption with your own estate is to specifically describe what happens if specific property is not a part of the estate.

3.7.2 – Alternative Disposition

What do you want to happen to the property if the person you were going to give it to dies before you?

Like everything else, if you want to make sure it gets done the way you want, you should specifically outline your wishes here.

3.7.3 – Simultaneous Deaths

People die in car accidents every day. Sometimes several people die at once.

It is for that reason that one should always consider simultaneous death with a beneficiary and describe how the estate should treat that event.

3.7.4 – Survivorship for a Specified Period

Many lawyers recommend that a beneficiary is only allowed to receive a bequest if they survive the testator by a specific number of days.

The reason for including this provision is a practical one. If the beneficiary dies shortly after the testator, the property could be subject to several (costly and time consuming) estate administrations.

It also prevents your stuff from being given away to someone who has no appreciation for it.

For example, imagine John Q. Client is survived by Archibald for 5 hours. The desk given as a gift would then pass to Archibald’s personal representative and might go to someone who has no appreciation of or use for it.

Usually the only place a survivorship provision should not be used is on a spouse. It’s a little complicated so we’ll discuss later.

3.8 – Cash Gifts

Article Four: I give twenty thousand dollars ($20,000) to the Regents of the University of Kansas, to be used for such of the general educational purposes of the University as they deem proper. However, if the total inventory value of the property of my estate subject to administration less liens and encumbrances isles than five hundred thousand dollars ($500,000), then the amount of this gift shall be reduced to an amount that bears the same relation to twenty thousand dollars ($20,000) as such adjusted inventory value of my estate bears to five hundred thousand dollars ($500,000).

One of the clear circumstances to be taken into account if you are giving away large cash gifts is the chance that the estate won’t have enough money after distributing the cash to take care of other obligations.

3.8.1 – Charitable Deduction for Tax Purposes

There is only one thing you need to know if you are considering giving some of your estate to charity AND it is important that the gift qualifies for an estate tax charitable deduction:

This stuff is complicated and you should have an estate planning attorney help you.

Here’s just a taste of what you need to know.

First, if you are giving less than the full interest in the property the gift will only apply for estate tax deduction purposes if:

  1. The gift is an undivided portion of the property;
  2. A remainder interest in a personal residence or farm;
  3. A charitable remainder trust;
  4. A charitable income interest; or
  5. A pooled income fund.

Second, if you are giving your house to charity but letting your spouse live in it for the rest of their life you may not be able to deduct that for charitable purposes (but you may be able to deduct it under the elective martial deduction).

3.8.2 – Other Ways to Satisfy a Cash Gift

A cash gift (or any other general legacy) may be satisfied in whole or in part by an inter vivos gift to the legatee (the person you want to give the gift to).

There are only two ways this works, though.

First, the will can declare that the lifetime gift should be deducted from the bequest in the will.

Second, the testator (the person writing the will) can declare the gift in a separate writing made after their will is executed.

Here’s a little estate planning lawyer tip: if you give a gift during life that is meant to satisfy a bequest in your will, take the safe route and execute a new will or a codicil to your existing will reflecting that this has occurred.

3.8.3 – Distribution in Kind

You can create a clause in your will that tells your executor to give people who are supposed to get cash gifts other kinds of gifts to satisfy the cash requirement.

But beware, there are potential problems with this.

You may not know this, but your estate could end up having to pay income tax in addition to an estate tax upon your death. How could this be? Gifts in kind is one way.

For example, let’s say you make a cash bequest of $10,000 to Joe and you allow your executor to satisfy that bequest with in kind assets. Your executor decides to give Joe $10,000 worth of stock. But, the analysis doesn’t end there. On the date the stock was valued as part of your estate the stock was valued at $8,000. On the date the stock was given to Joe it was valued at $10,000. Because of this, your estate will be on the hook for that extra $2,000 and will have to pay income tax on it!

3.8.4 – Forgiveness of Debt

In many ways the forgiveness of a debt, which is something you can do in your will, is essentially the same thing as a cash bequest.

This is okay, but it’s important to know there are some potential income tax implications (similar to the distribution in kind scenario just outlined).

And, depending on the specific language of the will and local law, the person’s whose debt was forgiven could be on the hook for a portion of the estate tax equivalent to the amount forgiven.

3.9 – Tangible Personal Property

Article Five: I give all of my clothing, furniture, furnishings and effects, automobiles, and other tangible personal property of every kind except jewelry and gifts of specific items of tangible personal property made under other provisions of this will to my wife if she survives me. If my wife does not survive me, I give such tangible personal property, excluding automobiles, to those of my children who survive me, to divide month themselves as they may agree. If my children do not agree with regard to the disposition of my personal property within sixty days of my death, I direct my executor to divide the property among them in shares as near equal in value as practicable, having due regard for the personal preferences of each child. The share of any child who is a minor at the time the property is distributed may be delivered without bond to the child’s guardian or to any suitable person with whom the child resides or who has custody or control of the child.

This sample clause attempts to take care of a few of the common problems that arise with the distribution of ones personal property:

  1. Getting beneficiaries to agree on distribution; and
  2. Reducing the burden on the guardian of your minor children.

When considering this clause, it might be prudent to think about the things you don’t want included under this general umbrella of “tangible personal property” including:

  • Money;
  • Precious metals;
  • Unmounted gems held for investment;
  • Evidences of indebtedness;
  • Documents of title; and
  • Securities and property used in trade or business.

If you don’t, you could have an argument among beneficiaries.

3.10 – Testamentary Gifts to Custodians for Minors

In Washington State you can transfer any property to a custodian to be held for the benefit of a minor. To make the process as smooth as possible it is best to follow the guidelines as laid out by statute.

3.11 – Disposition of Tangible Personal Property in Accordance with Testator’s Subsequent Directions

Article Six: I give all of my jewelry to the persons and in the shares designated on a written list I intend to leave.

This rule came into existence because people were having to change their will every time they decided they wanted to give a piece of property to someone else. The idea is to make things simpler and cleaner.

3.11.1 – Incorporation by Reference

Most places allow you to incorporate a document like this into your will by reference.

But there is a catch. It needs to be in existence at the time the will was executed and needs to be formally executed just like a will.

Kind of defeats the purpose, right?

3.11.2 – Facts or Acts of Independent Significance

This doctrine allows you to have a separate list but not go through the formalities of executing the list every time you want to change something and requiring it to be in existence at the time of the will.

Although this is not the safest route to take to ensure that everyone gets what they are supposed to, it is more convenient and more likely to be a complete and up to date list than requiring a new will or codicil to be executed every time there is a change.

3.11.3 – Bequest with Request

Under this approach the testator would leave all of the property to one person with the idea that they would have instructions on how to dispose of the property.

There are a couple of issues with this method, though.

First, the person you give all of your property to is under no legal obligation to follow your wishes.

Second, state and federal transfer taxes are generally computed with the belief that the beneficiary named in the will is the outright owner of the property. This can create problems for the beneficiary when they then distribute the property (is is treated as a part of their estate now).

3.11.4 – Informal Lists

In Washington State, you can use an informal list to dispose of your personal property, which is pretty amazing.

Here’s what you need to know:

  • Your will or trust must refer to the writing;
  • The writing must be in the handwriting of the testator or signed by the testator; and
  • The writing must describe the items and the recipients with reasonable clarity.

The writing can be made before or after you execute your will.

And, if the person on the list dies before you, that gift does not pass to their heirs, it goes back into your estate and is distributed according to the remaining directions of your will.

A couple of things to consider:

  • this list may not be effective if you move to a state where this rule doesn’t apply;
  • Keep this statement with your will;
  • Make sure if you create a new list that you destroy the old one to prevent any confusion;
  • Don’t give away anything of substantial value with this list – it’s just not smart.

3.12 – Gift of Corporate Securities

Article Seven: I give one hundred shares of the common stock of ZYX, Inc., which I now own, as the same may be hereafter increased or decreased by reason of stock dividends, stock splits, mergers, consolidations, or reorganizations (but disregarding rights to purchase stock, whether exercised or not), to my brother if he survives me. If I do not own a sufficient number of the shares of stock at the time of my death to satisfy this gift in full, then the gift shall be limited to the number of shares, if any, owned by me. If my brother does not survive me, no property shall pass under this Article.

As with many of the bequests we’ve covered here, the more specific you are with what you want the better.

For example, if you want the person to get all of “XYZ Inc.” stock then you should specifically say so.

Need a will? Call me today. I’ve got the best prices and the best service.

Cheers,

Christopher Small
Estate Planning Attorney
CMS Law Firm LLC
150 Lake St., Suite 227
Kirkland, WA 98033
206.659.1512