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Trusts and Estates Newsletter

Inheritance Without Planning Means No Provisions Beyond the Default Plan

When a person dies intestate (without making and leaving a will), each state provides a default plan (usually known as the statute of descent and distribution), under which his or her net estate is disposed. When a person dies intestate, there is no adding of provisions beyond the default plan. The default plan is only the plan and nothing more. This article discusses the disadvantages of descent and distribution related to the inability to add provisions beyond the default plan.

Straighten-out Financial Situations
State statues of descent and distribution are not designed to straighten-out the financial affairs of an intestate. Death usually leaves financial loose-ends. Under descent and distribution, a person who wants to plan the disposition of his or her estate cannot forgive debts, loans, or advancements owed to the person or his estate. Such a person cannot anticipate the assignment of an expectancy, a renunciation, or a disclaimer.

Make Moral Judgments
It is important to note that, for the most part, the a state statute of descent and distribution does not make moral judgments, other than to assume that an intestate would want his or her property to go to the “natural objects of his or her bounty” after his or her death, as determined by the state legislature in advance of his or her death in a non-personal manner. Under descent and distribution, a person who wants to plan the disposition of his or her estate cannot transfer property based on his or her own judgment of the heir’s or other recipient’s moral worthiness. Related to this point is the fact that under descent and distribution, a person who wants to plan the disposition or his or her estate cannot favor one person in the same class over another. For example, a parent who has four children, three of whom have been blessed with good fortune and one who has not, cannot favor the unfortunate child over the fortunate children.

Disposition of One’s Dead Body
State statutes of descent and distribution are only designed to dispose of an intestate’s net estate. When a person dies, some matters may need to be provided for other than the intestate’s net estate. A human body is not property in the sense that it can be bought or sold. Under descent and distribution, a person who wants to plan the disposition of matters other than his or her estate cannot direct, among other things, the disposition of his or her dead body.

Waive Bond
Under descent and distribution, a person who wants to plan the disposition of his or her estate cannot waive the requirement of having his or her personal representative obtaining a fiduciary bond.

Some of the Advantages of Making a Will
All of the disadvantages of descent and distribution related to the inability to add provisions beyond the default plan can be overcome by making a will. To overcome the disadvantages of descent and distribution, have your lawyer prepare a will (and any other estate planning documents) for you.

Letters of Instruction
Your will should not mention each one of your possessions because their value and nature change as time goes on. Revising your will upon every change would be both inconvenient and costly. Instead, your will should use general language in addressing the disposal of your possessions. However, it is important that you keep an updated record of all your possessions in order to assist your survivors. A letter of instruction contains such an inventory. Because a letter of instruction is more likely than a will to be read immediately after death, it can also be a good place to assert your wishes about how you would like your body disposed of and your funeral arranged. A letter of instruction is the best place to make private statements to your survivors because your will, if probated, becomes a public document.

A letter of instruction should list your assets and liabilities, should specify their location, and should identify their form of ownership. There are many subjects that can be addressed in a letter of instruction:

  1. Liquid assets such as bank accounts, certificates of deposit, savings bonds, and money market accounts
  2. Stocks and bonds, including the name of any brokerage firms and a schedule of dividend due dates
  3. Insurance policies listed by insurer, policy number, face value, and beneficiaries
  4. Medical and death benefits
  5. Registered possessions such as cars and boats
  6. Liabilities like mortgages, loans, and credit card accounts

Despite its benefits, a letter of instruction is not a legal document and is not binding on your survivors. It contains information, not orders. You should include information on:

  1. Location of personal papers like birth certificates, military records, and tax returns
  2. Where you keep important keys and what locks they open
  3. Location of any safe deposit boxes or post office boxes
  4. Codes for locks, safes, and alarms
  5. Emergency contact information including child caretakers, pet caretakers, and property caretakers
  6. Places where you have hidden prized possessions
  7. Monetary or personal value of antiques/collectibles/heirlooms

Because it is not a legal document, a letter of instruction does not have to be a formal written letter. It can be in a number of informal formats such as on notebook paper, on index cards, or on a computer. Remember to update your letter of instruction as changes occur.

Co-Ownership Myths – III
One of the most confusing aspects of estate planning is the numerous myths about co-ownership of property. Many people do not understand the differences between a tenancy in common and a joint tenancy with right of survivorship. Many people do not understand what a tenancy by the entirety is or was. Many people do not understand the differences between the common law forms of co-ownership and community property. Moreover, people may define their own forms of co-ownership by contract. This article discusses some of the many myths about the co-ownership of property.

Right of Survivorship Versus Will
There is a myth that a right of survivorship applies only if a co-owner dies intestate. The myth leads to the myth that a co-owner of a joint tenant with right of survivorship, or other similar co-ownership, can give away his or her share of the property in a will or trust. The myth is not true because, as a general rule, a right of survivorship prevents the property from being given away in a will or transferred to a trust. The only exceptions are where the co-owner survives all other co-owners to become sole owner, or where all co-owners die simultaneously, leaving each estate entitled to an equal share. Contrary to the myth, in general, the share of a deceased co-owner of a joint tenancy with right of survivorship, or other similar co-ownership, passes automatically to the surviving co-owner or co-owners even if the deceased co-owner provided otherwise in a will or trust. There is a myth that a right of survivorship represents the only way that property in a joint tenancy with right of survivorship, or other similar co-ownership, can be transferred. The myth is not true because marital property in a joint tenancy with right of survivorship, or other similar co-ownership, can be severed by consent, divorce, dissolution, or annulment. The myth is not true because non-marital property in a joint tenancy with right of survivorship, or other similar co-ownership, can be severed by consent or by a co-owner’s selling or giving away his or her share during life. Severance of the co-ownership can also be forced by a creditor of a co-owner. If the creditor has attached the co-owner’s share, the whole property may be sold in order to collect that co-owner’s share of the property.

Community Property
There is a myth in community property states that community property cannot be put into a common law joint tenancy with right of survivorship. The myth is not true because community property is under the dual control of both husband and wife. A husband and wife may agree to put their community property in a joint tenancy with right of survivorship. The result, then, is that when a spouse dies, the deceased spouse’s share of the community property will automatically pass to the surviving spouse, rather than passing to the deceased spouse’s estate.

Your lawyer
It is wise to consult your lawyer when you want to make changes to, sell, or give away co-owned property. Your lawyer can help you avoid any misunderstandings stemming from the numerous myths about the co-ownership of property.

Lapse and Mistake
One of the main purposes for making and leaving a will is to guide the administration of the estate of the testator–the person who made the will. A will should be written in language that is clear and indisputable. Alas, the language in a will may be unclear or vague. This article discusses the will interpretation and construction issues of lapse and mistake.

Lapse
If a beneficiary named in a will is dead when the will is made, the gift to the beneficiary is ignored as being of no effect. The property in the gift becomes part of the residuary estate. The residuary estate is disposed of according to the will’s residuary clause, if any. If there is no residuary clause, the residuary estate is disposed of as if there were no will. As a general rule, if a beneficiary named in a will is alive when the will is made but dies before the testator, the gift to the beneficiary fails. This occurrence is known as lapse. If the lapse is not prevented by a state anti-lapse statute, and if the will does not provide another disposition of the property in the lapsed gift, the property in the lapsed gift is disposed of according to the will’s residuary clause, if any. If there is no residuary clause, the residuary estate is disposed of as if there were no will. If a beneficiary disclaims or renounces a gift, the disclaimer or renunciation is treated as a lapse.

Mistake
A major reason for interpretation or construction of a will is dealing with an apparent mistake or what is arguably a mistake. The mistake may be made either by the testator, by the testator’s attorney, or by the attorney’s assistants. Suppose it is claimed that a provision was omitted from the will by mistake. As a general rule, the probate court will set aside the claim. There is a presumption that a will executed with the appropriate formalities contains all the provisions the testator intended. On the other hand, if it is claimed that a provision was included in the will by mistake, the probate court may hear evidence regarding the intent of the testator and ignore the provision if it is proven to be a mistake. If the intent of the testator is clear and there appears to be a clerical mistake, most courts will either ignore the mistake or reform the will, as appropriate. Otherwise, most courts are reluctant to correct alleged errors. Even if a testator has made a “mistake” in his or her will, the will is still by definition the testator’s declaration of the testator’s testamentary intent.

Special Conditions in a Will
As a general rule, a devise, a bequest, a legacy, or a trust in a will may benefit any person or legal entity. One major limitation is that is that a devise, a bequest, a legacy, or a trust in a will may not benefit a person or legal entity if it does not meet a condition imposed by the testator. Most conditions are routine, such as rewarding a child with more money if he or she attends college. Some conditions are more unusual, and so, special.

In Terrorem Clauses
A will provision may specifically disinherit any person or persons, including those persons who would technically be the natural objects of the testator’s bounty. The only limitation on such disinheritance is that a surviving spouse usually has a right to elect a statutory share of the estate against what, if anything, is left for the surviving spouse in the will. In other words, a surviving spouse can only be disinherited to the extent he or she can elect against the will. The concepts of condition and disinheritance can be combined. In what is known as an in terrorem clause, a will may make a gift on the condition that the beneficiary of the gift not contest the validity of the will. A Latin phrase, in terrorem means “In fright or terror; by way of threat.” The threat is disinheritance. The idea is that although the beneficiary may feel that he or she is entitled to more of the testator’s estate, he or she will not risk losing what he or she has received by contesting the validity of the will. An in terrorem clauses is always as effective as it may first appear, because if a court rules that the beneficiary had good cause for contesting the will, the court may also rule that the in terrorem clause is invalid due to public policy.

Powers of Appointment
Instead of putting conditions on a gift in an effort to control who inherits, a testator may give a trusted person the power to transfer particular property of the testator as the trusted person deems appropriate, after the testator’s death. Giving such a power is known as giving a power of appointment. In essence, a power of appointment allows the trust person to put conditions on a gift.
A general power of appointment gives the trusted person the power to transfer to anyone. A special power of appointment gives the trusted person the power to transfer to particular persons or within other limits. Again, a power of appointment given in will is not effective until after the testator’s death.

Nominating an Executor or Executrix
The next step beyond giving a trusted person the power to transfer particular property of the testator is the testator giving a trusted person the power to transfer property to a group (e.g., “my children”) divided as the trusted person deems appropriate. In essence, that is what happens when a testator leaves property in his or her estate to a group and nominates the person he or she wants to take charge of and administer his or her estate. Traditionally, if that trusted person is a man, he is known as an executor, and if that trusted person is a woman, she is known as an executrix. Under his or her power to administer the estate, the executor or executrix decides who gets what within the group.