FREQUENTLY ASKED QUESTIONS ABOUT ESTATE PLANNING
(The following is provided for general information and not for specific legal advice)
CONTENTS
A. ESTATE PLANNING TEAM
B. CONCEPT OF ESTATE
C. OWNERSHIP BY DEED OR TITLE INSTRUMENTS
D. POWERS OF ATTORNEY
E. LAW OF DESCENT AND DISTRIBUTION
F. PROBATE
G. WILLS
H. TRUSTS
I. LIFE INSURANCE
J. TRANSFER ON DEATH OR “TOD”
K. LIVING WILL
L. ESTATE PLANNING INSTRUMENTS
M. INTERNET AND FORM BOOK INSTRUMENTS
A. ESTATE PLANNING TEAM
1. Should you have an estate planning team? Yes. In order to make the most effective estate plan for yourself and your family you should take a comprehensive approach. This is most effectively done by bringing together the expertise of various experts.
2. Who should I consider being on my estate planning team? We would normally expect the team to include:
(a) An attorney,
(b) A financial advisor,
(c) A tax advisor,
(d) A funeral director, and
(e) An insurance advisor
B. CONCEPT OF ESTATE
1. What is an estate for estate planning purposes? The concept to understand when estate planning is involved is an estate is what is controlled by the document or instrument involved. Such could include a deed, a trust, a will or any number of other instruments. For example, what is the trust estate?
It is the property or assets subjected to the control of the trust. This may be all or only a portion of the total assets a person has.
C. OWNERSHIP BY DEED OR TITLE INSTRUMENTS
1. Are there different ways to own an asset?
Yes. These are usually sole ownership, as joint tenants, as tenants in common, as a life estate or a title with an “or” title.
2. What is sole ownership?
Sole ownership means that the asset is owned by one legal entity, such as a person or a corporation.
3. What are the usual ways assets are held jointly?
Joint tenancy and tenancy in common or by an “OR” title.
4. What is joint tenancy and tenancy in common?
Joint Tenancy and Tenancy in Common means the asset is held by two or more persons in equal shares without being able to distinguish one person’s interest from the other person’s interest. The difference is ownership after the death of one of the tenants. In Joint Tenancy when a joint tenant dies the surviving joint tenant owns the decedent’s portion and the decedent’s ownership interest is not controlled by a will or the law of descent and distribution when there is no will. If a tenant in common dies the surviving tenant in common does not own the decedent’s portion but the decedent’s interest goes to his or her heirs and can be controlled by a will.
5. What is an “OR” title?
Often times there are a title instrument, like a car title or a bank account, that is held in names such as John Doe or Mary Doe. This means either listed owner has an undivided interest in the item and if one dies the survivor owns the item. During life time either of the owners can dispose of the item without the other’s consent. Such could be the sale of an automobile or the closing of a bank account.
D. POWERS OF ATTORNEY
1. What is a power of attorney?
A power of attorney is a grant of authority from one person to another to act on their behalf. They are often given by an older person with limited mobility or physical handicap to a child or other person to assist them in paying their bills or taking care of a business matter. Although many think otherwise a power of attorney does not survive death of the person giving the power of attorney. A power of attorney should only be given to someone that is trustworthy. The person holding the power of attorney can take whatever action is allowed by the power of attorney which might include emptying a bank account. The person granting the power of attorney is legally bound to whatever action the person’s agent takes pursuant to the power of attorney.
2. Are there different types of powers of attorney?
Yes. Powers of attorney can be classified by the powers granted as a “General Power of Attorney” and a “Special Power of Attorney.” Powers of attorney can also be categorized in terms of duration as a “Durable Power of Attorney.” The types can be blended and thus you could have a Durable General Power of Attorney.
3. What is a General Power of Attorney?”
A General Power of Attorney grants all and any powers and authority the person granting has in their own right. This could include selling, mortgaging, spending, buying and contracting. A General Power of Attorney provides the greatest flexibility but also provides the greatest risk of loss because of the unlimited authority.
4. What is a Special Power of Attorney?
A Special Power of Attorney, unlike the wide open General Power of Attorney, limits its use to a specific power; such as a power to sell my house located at 100 Grand, Anywhere, United States. Accordingly, the risk to the person granting the Special Power of Attorney is limited compared to the General Power of Attorney because authority is restricted. In estate planning often a Special Power of Attorney referred to as a “Medical Power of Attorney” is a part of the entire plan. The Medical Power of Attorney usually authorizes the agent to deal with physicians and hospitals in the health care of the grantor and can be extremely helpful.
5. What is a Durable Power of Attorney?
At common law the person granting a power of attorney had to have competency to enter into contracts and if after the power of attorney was given the person granting the power of attorney became incompetent the power of attorney lapsed. This of course often made others reluctant to accept a power of attorney because they would have no idea whether the grantor was still competent, especially if the power of attorney had been granted several years previously. Statutes have been passed that if they are complied with in the granting of the power of attorney they survive the incompetency of the grantor. Thus, they are called “Durable Powers of Attorney.” There can be both General and Special Durable Powers of Attorney.
6. Can a power of attorney be revoked?
Yes. The practical problem presented in revoking is making certain that notice of the revocation is given to those that have or might have relied upon the to be revoked power of attorney and for that matter might in the future rely upon the power of attorney. Needless to say, making certain that all possibilities receive notice can be a problem.
E. LAW OF DESCENT AND DISTRIBUTION
1. What is the law of descent and distribution?
Each state by its statues provides what happens to a person’s estate if there is no will or other preplanning for the distribution the person’s assets upon death. It is the so called state’s will and its provisions may or may not distribute a person’s assets the way they wish them distributed upon death.
2. How does the law of descent and distribution work?
The statute details who a person’s heirs are and they can be referred to as the person’s heirs at law. The statutes are detailed and make provision for various contingencies such as for example: “If the decedent died with a surviving spouse and no surviving children but had surviving parents then one-half of the estate to the surviving spouse and one-half equally to the surviving parents.”
3. Does the distribution of a person’s estate have to be controlled by the law of descent and distribution?
No, but with a qualification. By the use of wills, trusts and other estate control devices a person can distribute their estate the way they want to regardless of the law of descent and distribution. The one qualification is that a spouse cannot, without their consent, be cut out of the estate by a will for less than the “spousal portion.” The “spousal portion” refers to the portion of the estate to go to the surviving spouse provided for in the law of descent and distribution.
F. PROBATE
1. What is probate?
Probate is a court process following death when a person's assets are transferred from the decedent to those entitled to share in the estate by the law of descent and distribution or by the terms of a will.
2. What steps are involved in a probate proceeding?
In sequence they generally are:
a. A petition for probate is filed in which it is requested that the heirs at law be determined and if a will is involved, that the will be admitted to probate.
b. Notice of hearing of the Petition for probate is given to all heirs, devisees, legatees and beneficiaries.
c. At the hearing of the Petition the court may determine the heirs, devisees, legatees and beneficiaries, appoint a personal representative (Administrator if no will and Executor if a will), and admit a will to probate if a will is involved, order a bond for the Administrator or Executor to be posted and consider any objections to the probate.
d. The personal representative gives notice to any creditors to submit any claims and if any are received determines whether they should be paid. Claims deemed legitimate are paid. If a creditor is not paid they may sue the estate for their claim and the personal representative defends against the claim.
e. The personal representative files an inventory of the estate.
f. The personal representative files state and federal estate tax returns if necessary along with any required last income tax return.
g. If it is necessary to sell any assets of the estate the personal representative does so in compliance with the state probate law.
h. Once claims are dealt with and tax releases are received the personal representative files to have a hearing to approve the personal representative’s actions and to order distribution of the estate and gives notice to heirs, devisees, legatees and beneficiaries.
i. At the hearing to conclude the estate the court approves the personal representative’s final account, orders distribution of the estate and considers any objections.
j. The personal representative distributes the estate assets and obtains receipts and files them with the Court.
k. Once distribution is made and receipts are obtained and filed the Court discharges the personal representative from further responsibility.
3. Does having a will avoid probate?
No. A will only details the decedent’s direction for distribution of the estate but a court order is necessary to carry those wishes into effect and that is what probate does.
G. WILLS
1. What is a will?
It is written document “made” and “executed” in accordance with state law that distributes assets upon the death of a person. It names a personal representative to carry the will through probate and can also be used to nominate guardians for minor children and establish a trust that comes into existence upon death.
2. Is there more than one type of will?
Yes. There are three types. One is the nuncupative will, the holographic (or olographic) will and the last I refer to as a formal will.
3. What is a nuncupative will?
This is an extremely rare type of will. Under Oklahoma statutes it is a will made by a service person on the battlefield or ship as they die or believe they will die or by a person who is at the time in expectation of immediate death from an injury received that day. It is oral with at least two witnesses and the estate cannot exceed $1,000.00.
4. What is a holographic (or olographic) will?
This is a will written entirely in the decedent’s own handwriting. It cannot be notarized or have witnesses and should not be on preprinted stationary. Often an attempted holographic will fails because the decedent had it notarized. Another failure with holographic wills is that the wording of the document may not be effective to be a will. For example, consider the difference between these two sentences. “I give to my son $1,000.00” versus “I would like for my son to receive a $1,000.00.” The direction to give is clear as to a bequest while the “like” sentence is not a direction but a simple wish. Reliance on a holographic will should be avoided because the attempt to be an effective will can easily fail.
5. What is a “formal will?”
My use of the phrase “formal will” is my attempt to distinguish it from other attempts to create a will. What makes a will a will is: (a) appropriate language and (b) appropriate execution. Appropriate language means language that is clearly dispositive of assets in the event of the death of the decedent. Appropriate execution means that will is executed by the correct number of witnesses under the appropriate circumstances. Often times an attempt to have a valid will fails because execution of the will was not appropriate.
6. Is there a special format for a “formal will”?
Yes. The language in the document must be of a dispositive nature as opposed to simple wishes or desires and in accordance with statutes must contain an appropriate attestation clause.
7. What is proper execution of a will?
The witnesses, at least two, and the Testator (if male) and Testatrix (if female) are in the same place at the same time and the Testator/Testatrix, and the Testator/Testatrix having read the document announces that the document is their last will and testament, that it disposes of their assets the way they wish them disposed of, and that the Testator/Testatrix is of sound and disposing mind, not under the influence of anyone in making the will, that they understand the nature and extent of their property, that they understand and know who would normally expect to be recipients of their estate, that they are of an age to be able to make a will and desire that the witnesses serve as witnesses. The witnesses must be of valid age in order to be witnesses and cannot be a beneficiary of the will. Assuming all is in order then the Testator/Testatrix signs the will and the witnesses sign the will as witnesses. Proper execution is essential to the validity of will.
8. What is a self proving affidavit?
In order to admit a will to probate it is normally necessary to call the witnesses to testify as to proper execution of the will. However, if a statutorily provided for self proving affidavit is made with the will then the will can be admitted without the necessity of having witnesses testify in court. Obviously a self proving affidavit can be is can be very helpful. If a will is contested it may still be necessary to call witnesses in order to admit the will to probate.
9. Can a person make guardian provisions for their minor children in their will?
Yes. A person with minor children can nominate a guardian for their surviving minor children. A nominated guardian will receive first consideration from a Court in appointing a guardian for the decedent’s minor children. Selection of a person to be a guardian should receive careful consideration and it should be discussed with the person under consideration to make certain they would be willing to take on the guardian’s role.
H. TRUSTS
1. What is a trust?
Essentially, it is a contract between the Trustor, sometimes called Settlor, and the Trustee to handle certain assets in accordance with the terms of the Trust.
2. How does a trust work?
The trust is a “living legal creature”, like a corporation, separate from the “owners.” A corporation is a separate “living legal creature” separate from the share holder owners even if there is only one shareholder. As such the Trust’s existence does not depend upon the continued existence of the person that established it or owns it. The trust “owns” assets that are held, administered and disposed of in accordance with the terms of the trust.
3. Who is involved with a trust?
There is a Trustor, a Trustee and a Beneficiary.
4. What are the functions of the Trustor, the Trustee and the Beneficiary?
(a) The Trustor, sometimes referred to as the Settlor, is the person or persons establishing the Trust.
(b) The Trustee manages the assets of the Trust according to the terms of the Trust.
(c) The Beneficiary receives the benefits of the Trust. (d) Although the Trustor, Trustee and Beneficiary can be different persons they are often the same person. A common example is a married couple, as Trustor, establish the Trust, and they are the Trustee and the Beneficiary. Upon the death of both of the married parties a successor Trustee, named in the Trust, assumes the office of Trustee and distributes the trust assets to the Beneficiary named to take the assets after the deaths of the original married couple.
5. What are revocable and irrevocable trusts?
A revocable trust is one that can be changed or revoked by the Trustor so long as the Trustor is competent and alive so control is retained. Upon death of the Trustor a revocable trust becomes irrevocable. An irrevocable trust is one that cannot be revoked by the Trustor and so the Trustor loses control. An irrevocable trust might have some tax benefit for the Trustor and so one thinking of establishing an irrevocable trust should consult with their tax advisor before establishing such a trust. On the other hand a revocable trust may not have any tax advantage for the Trustor but retention of control can be of over riding importance to the Trustor.
6. What are some of the uses of Trusts?
Among the reasons for establishing trusts are the following: (a) A trust can be used to avoid probate. The trust establishes what is to be done with the assets controlled by the trust in the event of the death of the Trustor. If the Trustor is also the Trustee, which is often the case, upon the death of the Trustor then the named successor Trustee assumes the office and then distributes the assets in accordance with the trust directions. It is essential that the trust “own” the asset in order to avoid probate. Avoiding probate can speed delivery of the trust assets to the beneficiaries since the time delays built into a probate are also avoided as are the expenses of probate.
(b) A trust can be used for privacy. If a probate is filed then in almost all cases an inventory of the assets must be filed in the case file, which is a public record and open to whoever wants to review the file. If probate is avoided only the Trustee and Beneficiaries have access to such information and not the general public.
(c) A trust can be used to control behavior. For example, a trust might provide that trust assets will be paid out over a period of time to a beneficiary instead of just in one lump sum. A trust might provide that a beneficiary must complete college by a certain age in order to received trust assets. The list can be endless.
(d) A trust in certain situations can be used to avoid taxes. This usually requires the use of an irrevocable trust. If tax avoidance is the goal then consult your tax advisor before setting up an irrevocable trust and in such circumstances the tax advisor and attorney should carefully coordinate their actions.
(e) A trust can be used by the Trustor to nominate their guardian in the event they become incompetent. If no guardian is nominated then the any number of different relatives or others may be seeking to be appointed a person’s guardian. If a guardian is nominated then those persons will receive consideration for appointment by the Court before others are considered.
7. What are the ways a trust is established?
(a) A trust can be specifically created by a written contract between the Trustor and the Trustee. This can be referred to as an Intervivos Trust or one that is created during the life of the Trustor. Assets can be transferred to it during the Testator’s life or from proceeds directed to it upon death of the Testator such as life insurance proceeds or as a result of the trust being named as a beneficiary of a 401K.
(b) A trust can be created in a will. This can be referred to as a Trust Causa Mortis or one that is created upon death. The will establishes the trust and it is funded by assets of the decedent and/or by life insurance proceeds. It comes into existence upon probate of the will creating the trust.
(c) The so called Totten Trust. This name is a result of case decision recognizing such as a trust. An example is a bank account denominated as: John Smith in trust for Sarah Smith. During the life of John Smith he can do as he pleases with the account but in the event of his death the account is the property of Sarah Smith. Needless to say such an arrangement is simplistic and leaves open other matters that might be provided for in a detailed trust. (d) Trusts can be created by operation of law. However, these are not trusts involved in estate planning. They are trusts recognized by a court to prevent a miscarriage of justice. Such could involve a promise by one person to provide another certain income from an investment if the promised person takes care of the promisor until the promisor dies and the promised person does exactly that. The promisor dies and it is discovered that the promisor never made any provision for the person receiving the promise for the assets involved. The promised person goes into court and asks the court to impose a trust on the assets in his or her favor.
8. Do I need a will if I have a trust?
Yes. The purpose of a will is to make certain that if one or more assets are not placed into the ownership then those assets are transferred at death to the trust to be distributed in accordance with the trust. It is like a safety net. It is referred to as a “Pour Over Will” as its purpose is to “pour” into the trust items not placed into the trust during the life of the Trustor. If a pour over will has to be used it means that probate has not been avoided by use of the trust. Good legal practice requires that even when a trust is created making a pour over will be recommended.
I. LIFE INSURANCE
1. How does life insurance fit into an estate plan?
Regardless of a person’s assets during life, life insurance can additionally provide for those a decedent might wish to provide for. Payment is upon death so the proceeds are usually available to the beneficiary before distribution of assets from a probate or from a trust. Life insurance can be used to provide ready cash to pay bills and funeral expenses.
2. Is life insurance controlled by probate laws or a trust?
No. Life insurance is paid to the named beneficiary upon death of the insured. Unless the named beneficiary of the policy is the trust or the estate then the probate laws or a trust are of no consequence.
3. What can life insurance do that might not otherwise be available in estate planning?
Regardless of what a person actually owns during life they may through the use of life insurance create a very large estate upon their death. Each person should consider the needs of others upon their death and confer with their insurance agent about how life insurance might assist in meeting the needs.
J. TRANSFER ON DEATH OR “TOD”
1. What is transfer upon death or “TOD” ?
This instruction is often found with asset accounts with stock brokersand financial planners and in some states it may also apply to real estate. It means that a TOD account is transferred to the recipient upon the death of the account holder. An asset in a TOD account is not part of a probate estate but that does not necessarily mean it escapes estate taxes. The use of TOD assets need to be considered in conjunction with the entire estate plan.
K. LIVING WILL
1. What is a living will?
Technically it is not a will in the sense that it disposes of assets. It makes provision for health care in the event the maker cannot make decisions for their self.
2. How does a living will work?
In the living will the maker details who will make decisions for them regarding food, water and medication in the event they cannot make the decisions for themselves. For example, it may provide that if I am unconscious and believed to be terminally ill I do not want extraordinary efforts made to keep me alive, but I do want to receive hydration and pain control medications.
3. Other than medical care can a living will make other provisions?
Yes. Some living wills provide for donation of organs, such as eyes, upon death.
4. If I have a living will should I also have a medical power of attorney?
Yes. A medical power of attorney is useful for you to have assistance in your health care management under circumstances that are not as severe as those provided for in living wills. An example, would be that while hospitalized you are under heavy medication to the extent that you are temporarily incompetent but your situation is not terminal. Under such a circumstance the hospital staff could look to the person holding your medical power of attorney to make a decision about whether or not a specific procedure may be authorized. The living will and medical power of attorney complement each other.
L. ESTATE PLANNING INSTRUMENTS
1. What instruments are normally included in a complete estate plan?
(a) Trust,
(b) Pour Over Will,
(c) Durable Power of Attorney,
(d) Medical Power of Attorney,
(e) Living Will,
(f) Insurance policy,
(g) Documents required by financial planner. (h) Deeds to carry out plan, and
(i) Title Documents to carry out plan.
(j) Funeral prearrangement documents
M. INTERNET AND FORM BOOK INSTRUMENTS
1. Can I just use forms I purchase through the internet and save money as they are often advertised as being created by top lawyers?
Certainly there are persons that use forms they buy over the internet or copy out of form books and the instruments may be valid.
2. Are there possible problems with the do it yourself estate planning?
(a) Consider that you can make a bad contract that is valid and enforceable but is not in your favor.
(b) Consulting with experts in the various areas involved in estate planning may provide ideas or possibilities simply filling out a form do not provide.
(c) Consulting with experts in the various areas involved in estate planning helps insure that you wishes are properly carried out and your family is protected.
(d) In legal practice do it yourself internet trusts are encountered after the trustor dies that significant assets were never actually placed into the trust ownership so the entire purpose of the trust of avoiding probate is defeated.
(e) Do it your self wills are encountered that while apparently valid on their face were not properly executed and thus in a will contest fail.
(f) Simply using forms without professional advice may result in tax liability that might have been avoided.
(g) Remember problems with an improper estate plan come to light after death of the person making the plan so the mistakes may not be able to be corrected. If your estate is important to you and your family do it the right way from the beginning.
(©yeksavich 2009)(2009-1)
