26-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

26-2

5• Personal Property and Bailments

• Real Property• Landlord and Tenant

• Estates and Trusts• Insurance Law

Property

PART

26-3

Estates and Trusts

PA ET RHC 26

When you have told anyone that you have left him a legacy, the only decent thing is to die at once.

Samuel Butler

26-4

Learning Objectives

• List and explain requirements for a valid will, changes, and revocation

• Identify tools for future disability• Explain intestacy (no will)• Describe estate administration• Detail formation & administration

of trusts, including revocation

26-5

• Each state has statutes and case law that regulates the distribution of property upon a person’s death– Uniform Probate Code, a comprehensive

model law, enacted in 16 states

• A person’s estate is all property owned by that person and estate planning refers to the process of planning for the transfer of a person’s estate in later life and at death

Overview

26-6

• A will is a document executed with specific legal formalities by a testator (person making will) that bears instructions about the way the person’s property will transfer at death– A will can direct only property

owned by the testator at the time of the testator’s death

The Will

26-7

• A bequest (also called legacy) is a gift of personal property or money – Ademption: a specific bequest of property

that is ineffective since the testator disposed of the property before death

• A devise is a gift of real property• The residuary is balance of the estate

left after specific devises and bequests have been made

Will Terminology

26-8

• Testamentary capacity (sound mind, legal age)– Standard for mental capacity is fairly low

• Execution with formalities of state law– A writing – Signed by the testator or someone else at

the testator’s direction– Signature witnessed, generally by two or

three disinterested witnesses

Requirements of Will Making

26-9

• A nuncupative will is an oral will – Recognized as valid in some states

under limited circumstances• Holographic wills are written and signed

in the testator’s handwriting

Informal Wills

26-10

• A person who takes property by will takes it subject to all claims against the property– Example: mortgage or lien

• Most states grant statutory rights to the surviving spouse of the testator in property owned solely by the testator – Specifics of the statutory right varies

from state to state

Limitations on Disposition by Will

26-11

• A will is revocable until the moment of the testator’s death– Thus confers no present interest in

property

• Wills may be revoked in many ways: – Physical destruction, crossing out the

will or creating a writing that expressly cancels the will, or executing a later valid will that expressly revokes the earlier will

Revocation of a Will

26-12

• An advance directive is a written document directing others how to make future health care decisions in the event that the person becomes incapacitated– Living wills and power of attorney

• In a living will, a person states in advance his/her intention to forgo or obtain certain life-prolonging medical procedures– See page 696 of text

Advance Directives

26-13

• Durable power of attorney gives another person legal authority to act on one’s behalf in case of mental or physical incapacity

• Durable power of attorney for health care gives the attorney in fact specific authority to make certain health care decisions for the person if the person becomes incompetent– Example: consent to or withholding surgery,

nursing home care, or withdrawing or prolonging life support

Advance Directives

26-14

• A person who dies without making a will, or if the will is declared invalid, is said to have died intestate– Property will be distributed to intestate’s

heirs in accordance with state intestacy or intestate succession statutes

– Estate of McDaniel v. McDaniel: due to divorce proceedings, wife not “surviving spouse” under intestate law

Intestacy

26-15

• When a person dies, the administration process or probate process provides the method to collect the property (probate estate), settle debts, and distribute remaining property of the decedent to those who will inherit by will or intestate succession– Process supervised by a probate court

Estate Administration

26-16

• A trust is a legal relationship in which a person with legal title to property (trustee) has the duty to hold it for the use or benefit of another person (beneficiary)– Beneficiary has equitable title to the

property since it is maintained for his/her benefit

Trusts

26-17

• A settlor or trustor creates the trust by one of several methods:– Owner of property may declare that

s/he is holding certain property in trust– By operation of law

•Example: constructive trust

– Express instrument in which owner of property transfers title to a trustee to hold for a beneficiary

Trusts

26-18

• An inter vivos trust is established and effective during the settlor’s lifetime

• A testamentary trust is established in a person’s will takes effect only at the death of the settlor

• Reasons for creating trusts include greater privacy (avoids probate process), more control over property management, and income and estate tax advantages

Trusts

26-19

• Trustee generally has broad management powers over property

• Trustee must use reasonable degree of skill, judgment, and care in the exercise of duties – May be held to higher standard if expected

to have a greater degree of skill (e.g., lawyer)

• Trustee owes a duty of loyalty (fiduciary duty) to the beneficiaries

Duties of the Trustee

26-20

• A trustee who breaches any of the duties of a trustee or whose conduct falls below the standard of care applicable to trustees may incur personal liability

Breach of Trust

26-21

Thought Question

• What would you write in your last will and testament?