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CHAPTER 44 WILLS, ESTATES, AND TRUSTS. DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.). TRANSFER OF AN ESTATE. Everyone has an estate, no matter how small. States govern the transfer of estates under probate codes.

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chapter 44 wills estates and trusts

CHAPTER 44WILLS, ESTATES, ANDTRUSTS

DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

transfer of an estate
TRANSFER OF AN ESTATE
  • Everyone has an estate, no matter how small.
  • States govern the transfer of estates under probate codes.
  • Probate Codes vary greatly from state to state.
wills
WILLS
  • Specifies who should inherit property, names guardian for minor children, and/or appoints a personal representative for the estate.
  • To make changes not necessary to write a new will.
  • Testator simply makes the changes in a codicil.
wills1
WILLS
  • Formal Wills:
    • Drafted by attorney.
    • Signed by testator and witnessed by at least two people.
  • Holographic Wills:
    • Written, signed, and usually dated in the testator’s own handwriting.
wills2
WILLS
  • Nuncupative Wills are oral.
    • Usually used only to dispose of personal property.
    • Must be heard by two or three disinterested witnesses.
    • Generally to be valid:
      • Made by civilian who anticipates death from an injury received that day.
      • Made by soldier or sailor who is in peril or in fear of death.
wills3
WILLS
  • Matching Wills:
    • Appropriate when testators have identical testamentary objectives.
    • Mutual wills: separate wills in which testators have matching provisions in their respective provisions.
    • Joint wills: two people sign the same document as their last will.
    • Contractual wills: people enter into valid contract in which one or more promise to make certain dispositions in their wills.
requirements for a valid will
REQUIREMENTS FOR A VALID WILL
  • Vary from state to state.
  • Person must be an adult the time the will is executed.
  • Testator must have testamentary capacity.
  • Requires person:
    • Understands the nature and extent of his or her assets.
    • Knows who his or her close relatives.
    • Understand the purpose of a will.
testamentary dispositions and restrictions
TESTAMENTARY DISPOSITIONS AND RESTRICTIONS
  • Person’s ability to make testamentary dispositions has limits.
  • Common restrictions:
    • There are limits on giving to charity called mortmain.
    • Trust established too long a period of time.
    • Do not allow testator to will money to pets.
    • Will provisions against public policy.
testamentary dispositions and restrictions1
TESTAMENTARY DISPOSITIONS AND RESTRICTIONS
  • If testator suspects someone will want to contest will, a no-contest clause may be inserted in it.
  • Generally, a will may exclude family members.
  • Actual heirs may receive their shares under different theories or philosophies.
  • Will can be ignored if it was signed under fraud, duress, or undue influence.
intestate succession
INTESTATE SUCCESSION
  • People often fail to sign or execute a valid will.
  • States provide for the transfer of assets of these people.
  • For people whose will does not completely dispose of their property.
  • Varies from state to state.
probate and estate administration
PROBATE AND ESTATE ADMINISTRATION
  • Probate determines the validity of a will.
  • Probate ensures estates are properly administered.
  • Representative must notify creditors, pay debts, pay an estate taxes, and distribute the remaining assets according to the will.
  • Personal representatives administer the estate and owe fiduciary duties to the beneficiaries.
avoiding probate
AVOIDING PROBATE
  • Property not subject to probate:
    • Entireties property.
    • Joint tenancy with rights of survivorship.
    • Life insurance paid to named beneficiary.
  • Ownership not subject to probate:
    • Pay-on-death ownership.
avoiding probate1
AVOIDING PROBATE
  • Advantages:
    • May reduce time and costs.
    • Provides privacy.
  • Disadvantages:
    • The estate will still pay taxes.
    • More paperwork.
    • Higher inheritance or estate tax liability.
    • Creditors will not be discharged for failing to file a claim against the estate.
    • Unprotected beneficiaries and creditors by law.
transfer taxes
TRANSFER TAXES
  • Federal Transfer Taxes:
    • Gift tax.
    • Estate tax.
    • Generation-skipping transfer tax.
  • State Transfer Taxes:
    • Gift tax.
    • Estate or inheritance taxes.
retirement plans
RETIREMENT PLANS
  • Pension plans have both income tax and transfer tax consequences.
  • Employer plans are:
    • Defined-benefit plan occurs when an employer promises to pay the retiree a set benefit based on percentage of employee’s average earnings and number of years worked under the plan.
    • Defined-contribution plan occurs when an employer promises to contribute a certain amount to the plan each year.
durable powers of attorney and living wills
DURABLE POWERS OF ATTORNEY AND LIVING WILLS
  • Durable powers of attorney used to make financial or medical decisions.
  • Maker concerned that he/she may become unavailable, incapacitated, or incompetent.
  • Durable power of attorney appoints a person to make decisions for the maker.
  • Living will does not dispose of assets at owners death.
durable powers of attorney and living wills1
DURABLE POWERS OF ATTORNEY AND LIVING WILLS
  • Living will explains how maker feels about the administration of certain medical treatments.
trusts defined
TRUSTS DEFINED
  • Fiduciary relationship where specific property is transferred to the care of a trustee.
  • Trusts may be voluntary arrangements created by the property owner.
  • Trust may be legal arrangements imposed by the courts or implied by law.
express trusts
EXPRESS TRUSTS
  • Voluntarily created by property owner.
  • Have a creator, a trustee, and one or more beneficiaries.
  • To be valid:
    • Intention or purpose of creator must be expressed.
    • Inferred from actions by creator.
express trusts1
EXPRESS TRUSTS
  • Purpose creators establish trusts:
    • Provide for more than one beneficiary.
    • Protect beneficiaries from themselves.
    • Legally reduce taxes.
  • Under Statute of Frauds most trust deeds must be in writing.
express trusts2
EXPRESS TRUSTS
  • Trust terminates:
    • When purpose is completed.
    • Term is over.
    • By mutual agreement.
    • It becomes uneconomical.
  • Revocable trust can be revoked by creator.
  • Irrevocable trust may not be terminated during the specified term of the trust.
express trusts3
EXPRESS TRUSTS
  • Private Trusts.
    • Created for an individual and is limited by the time period specified in the rule against perpetuities.
  • Charitable Trusts.
    • Trusts where money is given to a charity for a public purpose and is tax free.
express trusts4
EXPRESS TRUSTS
  • Additional Types of Express Trusts
    • Accumulation trust: reinvests income.
    • Sprinkling trust: trustee determines which beneficiary receives income and how much.
    • Spendthrift trust: protects beneficiary from imprudent spending habits.
    • Discretionary trust: trustee has discretion to pay or not pay beneficiaries.
advantages of trusts
ADVANTAGES OF TRUSTS
  • Flexibility.
  • Funding of trust can occur over a period of time.
disadvantages of trusts
DISADVANTAGES OF TRUSTS
  • If trust is irrevocable, creator cannot withdraw money for emergencies.
  • Fees.
  • May increase the amount of taxes paid.
selection of trustees and executors
SELECTION OF TRUSTEES AND EXECUTORS
  • Trustees and executors have broad powers and discretion, important to select them wisely.
  • If decedent does not have valid will naming executor, the probate court will appoint an administrator.
  • Administrators, executors, and trustees referred as fiduciaries.
selection of trustees and executors1
SELECTION OF TRUSTEES AND EXECUTORS
  • Corporate fiduciaries:
    • Do not die.
    • Generally have the expertise needed to do a competent job.
    • Does not need to be bonded for faithful performance of its duties.
    • Last forever.
    • Charge fees.
selection of trustees and executors2
SELECTION OF TRUSTEES AND EXECUTORS
  • Individual fiduciaries:
    • Do not last forever.
    • May serve without fees.
    • Have more knowledge about the business.
    • Personally concerned for the well-being of the beneficiary.
    • Biased toward certain beneficiaries.
duties of trustees and executors
DUTIES OF TRUSTEES AND EXECUTORS
  • Trustee’s duties:
    • Is suppose to protect and preserve the trust corpus.
    • Make the assets productive.
    • Obligation to follow the terms of the trust.
    • Duty of care.
      • Trustees must act with the care, skill, and prudence of a businessperson managing his or her own property.
duties of trustees and executors1
DUTIES OF TRUSTEES AND EXECUTORS
  • Trustee’s duties:
    • Duty of loyalty.
      • Not to take advantage of situations involving conflicts of interest.
      • To be as impartial as possible among beneficiaries.
    • Duty to diversify the types of investments.
    • Duty to account.
    • Trustee must not mix personal funds with trust funds.
duties of trustees and executors2
DUTIES OF TRUSTEES AND EXECUTORS
  • Trustee’s duties:
    • Trustee must not borrow money or mortgage trust property.
    • Trustee will have incidental authority to carry out ordinary duties.
  • Executor’s duties parallel those of a trustee.
  • Both have fiduciary duties to beneficiaries.
duties of trustees and executors3
DUTIES OF TRUSTEES AND EXECUTORS
  • Executor responsible:
    • For filing estate and inheritance tax returns.
    • Paying the applicable taxes.
    • Filing accounts with probate court.
implied trusts
IMPLIED TRUSTS
  • Implied trusts created by operation of law or imposed by courts.
  • Resulting Trusts
    • Owner of property disposes of property but the disposition is not complete.
    • Person purchases real property with his/her own money and puts title in name of another, without intending to make a gift.
    • Resulting trust occurs only if the owner is acting in good faith.
implied trusts1
IMPLIED TRUSTS
  • Constructive Trusts:
    • An equitable remedy.
    • Arises by operation of law to redress a wrong or to prevent unjust enrichment.
    • Created to correct unfair results.