CHAPTER 44 WILLS, ESTATES, AND TRUSTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and...

CHAPTER 44CHAPTER 44WILLS, ESTATES, ANDWILLS, ESTATES, AND

TRUSTSTRUSTS

CHAPTER 44CHAPTER 44WILLS, ESTATES, ANDWILLS, ESTATES, AND

TRUSTSTRUSTS

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

TRANSFER OF AN ESTATETRANSFER OF AN ESTATETRANSFER OF AN ESTATETRANSFER OF AN ESTATE

Everyone has an estate, no matter how Everyone has an estate, no matter how small.small.

States govern the transfer of estates under States govern the transfer of estates under probate codes.probate codes.

Probate Codes vary greatly from state to Probate Codes vary greatly from state to state.state.



WILLSWILLSWILLSWILLS

Specifies who should inherit property, Specifies who should inherit property, names guardian for minor children, and/or names guardian for minor children, and/or appoints a personal representative for the appoints a personal representative for the estate.estate.

To make changes not necessary to write a To make changes not necessary to write a new will.new will.

Testator simply makes the changes in a Testator simply makes the changes in a codicil. codicil.



WILLSWILLS

Formal Wills:Formal Wills:– Drafted by attorney.Drafted by attorney.– Signed by testator and witnessed by at least two Signed by testator and witnessed by at least two

people.people.

Holographic Wills:Holographic Wills:– Written, signed, and usually dated in the Written, signed, and usually dated in the

testator’s own handwriting.testator’s own handwriting.



WILLSWILLSWILLSWILLSNuncupative Wills are oral. Nuncupative Wills are oral.

– Usually used only to dispose of personal Usually used only to dispose of personal property. property.

– Must be heard by two or three disinterested Must be heard by two or three disinterested witnesses.witnesses.

– Generally to be valid:Generally to be valid: Made by civilian who anticipates death from an Made by civilian who anticipates death from an

injury received that day.injury received that day. Made by soldier or sailor who is in peril or in fear of Made by soldier or sailor who is in peril or in fear of

death.death.



WILLSWILLSMatching Wills:Matching Wills:

– Appropriate when testators have identical Appropriate when testators have identical testamentary objectives.testamentary objectives.

– Mutual wills: separate wills in which testators Mutual wills: separate wills in which testators have matching provisions in their respective have matching provisions in their respective provisions.provisions.

– Joint wills: two people sign the same document Joint wills: two people sign the same document as their last will.as their last will.

– Contractual wills: people enter into valid Contractual wills: people enter into valid contract in which one or more promise to make contract in which one or more promise to make certain dispositions in their wills.certain dispositions in their wills.



REQUIREMENTS FOR A VALID REQUIREMENTS FOR A VALID WILLWILL

REQUIREMENTS FOR A VALID REQUIREMENTS FOR A VALID WILLWILL

Vary from state to state.Vary from state to state. Person must be an adult the time the will is Person must be an adult the time the will is

executed. executed. Testator must have testamentary capacity.Testator must have testamentary capacity. Requires person:Requires person:

– Understands the nature and extent of his or her assets.Understands the nature and extent of his or her assets.– Knows who his or her close relatives. Knows who his or her close relatives. – Understand the purpose of a will.Understand the purpose of a will.



TESTAMENTARY DISPOSITIONS TESTAMENTARY DISPOSITIONS AND RESTRICTIONSAND RESTRICTIONS


Person’s ability to make testamentary Person’s ability to make testamentary dispositions has limits.dispositions has limits.

Common restrictions:Common restrictions:– There are limits on giving to charity called There are limits on giving to charity called

mortmain.mortmain.– Trust established too long a period of time.Trust established too long a period of time.– Do not allow testator to will money to pets.Do not allow testator to will money to pets.– Will provisions against public policy.Will provisions against public policy.




If testator suspects someone will want to If testator suspects someone will want to contest will, a no-contest clause may be contest will, a no-contest clause may be inserted in it.inserted in it.

Generally, a will may exclude family Generally, a will may exclude family members.members.

Actual heirs may receive their shares under Actual heirs may receive their shares under different theories or philosophies.different theories or philosophies.

Will can be ignored if it was signed under Will can be ignored if it was signed under fraud, duress, or undue influence. fraud, duress, or undue influence.



INTESTATE SUCCESSIONINTESTATE SUCCESSIONINTESTATE SUCCESSIONINTESTATE SUCCESSION

People often fail to sign or execute a valid People often fail to sign or execute a valid will.will.

States provide for the transfer of assets of States provide for the transfer of assets of these people.these people.

For people whose will does not completely For people whose will does not completely dispose of their property.dispose of their property.

Varies from state to state.Varies from state to state.



PROBATE AND ESTATE PROBATE AND ESTATE ADMINISTRATIONADMINISTRATION

PROBATE AND ESTATE PROBATE AND ESTATE ADMINISTRATIONADMINISTRATION

Probate determines the validity of a will. Probate determines the validity of a will. Probate ensures estates are properly administered.Probate ensures estates are properly administered. Representative must notify creditors, pay debts, Representative must notify creditors, pay debts,

pay an estate taxes, and distribute the remaining pay an estate taxes, and distribute the remaining assets according to the will.assets according to the will.

Personal representatives administer the estate and Personal representatives administer the estate and owe fiduciary duties to the beneficiaries.owe fiduciary duties to the beneficiaries.



AVOIDING PROBATEAVOIDING PROBATE

Property not subject to probate:Property not subject to probate:– Entireties property.Entireties property.– Joint tenancy with rights of survivorship.Joint tenancy with rights of survivorship.– Life insurance paid to named beneficiary.Life insurance paid to named beneficiary.

Ownership not subject to probate:Ownership not subject to probate:– Pay-on-death ownership.Pay-on-death ownership.



AVOIDING PROBATEAVOIDING PROBATEAVOIDING PROBATEAVOIDING PROBATE Advantages:Advantages:

– May reduce time and costs.May reduce time and costs.– Provides privacy.Provides privacy.

Disadvantages:Disadvantages:– The estate will still pay taxes.The estate will still pay taxes.– More paperwork.More paperwork.– Higher inheritance or estate tax liability.Higher inheritance or estate tax liability.– Creditors will not be discharged for failing to file a Creditors will not be discharged for failing to file a

claim against the estate.claim against the estate.– Unprotected beneficiaries and creditors by law. Unprotected beneficiaries and creditors by law.



TRANSFER TAXESTRANSFER TAXESTRANSFER TAXESTRANSFER TAXES

Federal Transfer Taxes:Federal Transfer Taxes:– Gift tax.Gift tax.– Estate tax.Estate tax.– Generation-skipping transfer tax.Generation-skipping transfer tax.

State Transfer Taxes:State Transfer Taxes:– Gift tax.Gift tax.– Estate or inheritance taxes.Estate or inheritance taxes.



RETIREMENT PLANSRETIREMENT PLANSRETIREMENT PLANSRETIREMENT PLANSPension plans have both income tax and Pension plans have both income tax and

transfer tax consequences.transfer tax consequences.Employer plans are:Employer plans are:

– Defined-benefit plan occurs when an employer Defined-benefit plan occurs when an employer promises to pay the retiree a set benefit based promises to pay the retiree a set benefit based on percentage of employee’s average earnings on percentage of employee’s average earnings and number of years worked under the plan.and number of years worked under the plan.

– Defined-contribution plan occurs when an Defined-contribution plan occurs when an employer promises to contribute a certain employer promises to contribute a certain amount to the plan each year.amount to the plan each year.



DURABLE POWERS OF DURABLE POWERS OF ATTORNEY AND LIVING WILLSATTORNEY AND LIVING WILLS

DURABLE POWERS OF DURABLE POWERS OF ATTORNEY AND LIVING WILLSATTORNEY AND LIVING WILLSDurable powers of attorney used to make Durable powers of attorney used to make

financial or medical decisions.financial or medical decisions.Maker concerned that he/she may become Maker concerned that he/she may become

unavailable, incapacitated, or incompetent.unavailable, incapacitated, or incompetent.Durable power of attorney appoints a Durable power of attorney appoints a

person to make decisions for the maker.person to make decisions for the maker.Living will does not dispose of assets at Living will does not dispose of assets at

owners death.owners death.



DURABLE POWERS OF DURABLE POWERS OF ATTORNEY AND LIVING WILLSATTORNEY AND LIVING WILLS

Living will explains how maker feels about Living will explains how maker feels about the administration of certain medical the administration of certain medical treatments.treatments.



TRUSTS DEFINEDTRUSTS DEFINEDTRUSTS DEFINEDTRUSTS DEFINED

Fiduciary relationship where specific Fiduciary relationship where specific property is transferred to the care of a property is transferred to the care of a trustee.trustee.

Trusts may be voluntary arrangements Trusts may be voluntary arrangements created by the property owner.created by the property owner.

Trust may be legal arrangements imposed Trust may be legal arrangements imposed by the courts or implied by law.by the courts or implied by law.



EXPRESS TRUSTSEXPRESS TRUSTSEXPRESS TRUSTSEXPRESS TRUSTS

Voluntarily created by property owner.Voluntarily created by property owner.Have a creator, a trustee, and one or more Have a creator, a trustee, and one or more

beneficiaries.beneficiaries.To be valid:To be valid:

– Intention or purpose of creator must be Intention or purpose of creator must be expressed.expressed.

– Inferred from actions by creator.Inferred from actions by creator.



EXPRESS TRUSTSEXPRESS TRUSTS

Purpose creators establish trusts:Purpose creators establish trusts:– Provide for more than one beneficiary.Provide for more than one beneficiary.– Protect beneficiaries from themselves.Protect beneficiaries from themselves.– Legally reduce taxes.Legally reduce taxes.

Under Statute of Frauds most trust deeds Under Statute of Frauds most trust deeds must be in writing.must be in writing.



EXPRESS TRUSTSEXPRESS TRUSTSTrust terminates:Trust terminates:

– When purpose is completed.When purpose is completed.– Term is over.Term is over.– By mutual agreement.By mutual agreement.– It becomes uneconomical.It becomes uneconomical.

Revocable trust can be revoked by creator.Revocable trust can be revoked by creator.Irrevocable trust may not be terminated Irrevocable trust may not be terminated

during the specified term of the trust.during the specified term of the trust.



EXPRESS TRUSTSEXPRESS TRUSTS

Private Trusts.Private Trusts.– Created for an individual and is limited by the Created for an individual and is limited by the

time period specified in the rule against time period specified in the rule against perpetuities.perpetuities.

Charitable Trusts.Charitable Trusts.– Trusts where money is given to a charity for a Trusts where money is given to a charity for a

public purpose and is tax free.public purpose and is tax free.



EXPRESS TRUSTSEXPRESS TRUSTSEXPRESS TRUSTSEXPRESS TRUSTS

Additional Types of Express TrustsAdditional Types of Express Trusts– Accumulation trust: reinvests income.Accumulation trust: reinvests income.– Sprinkling trust: trustee determines which Sprinkling trust: trustee determines which

beneficiary receives income and how much.beneficiary receives income and how much.– Spendthrift trust: protects beneficiary from Spendthrift trust: protects beneficiary from

imprudent spending habits.imprudent spending habits.– Discretionary trust: trustee has discretion to Discretionary trust: trustee has discretion to

pay or not pay beneficiaries.pay or not pay beneficiaries.



ADVANTAGES OF TRUSTSADVANTAGES OF TRUSTSADVANTAGES OF TRUSTSADVANTAGES OF TRUSTS

Flexibility.Flexibility.Funding of trust can occur over a period of Funding of trust can occur over a period of

time.time.



DISADVANTAGES OF TRUSTSDISADVANTAGES OF TRUSTSDISADVANTAGES OF TRUSTSDISADVANTAGES OF TRUSTS

If trust is irrevocable, creator cannot If trust is irrevocable, creator cannot withdraw money for emergencies.withdraw money for emergencies.

Fees.Fees.May increase the amount of taxes paid.May increase the amount of taxes paid.



SELECTION OF TRUSTEES AND SELECTION OF TRUSTEES AND EXECUTORSEXECUTORS


Trustees and executors have broad powers Trustees and executors have broad powers and discretion, important to select them and discretion, important to select them wisely.wisely.

If decedent does not have valid will naming If decedent does not have valid will naming executor, the probate court will appoint an executor, the probate court will appoint an administrator.administrator.

Administrators, executors, and trustees Administrators, executors, and trustees referred as fiduciaries.referred as fiduciaries.




Corporate fiduciaries:Corporate fiduciaries:– Do not die.Do not die.– Generally have the expertise needed to do a Generally have the expertise needed to do a

competent job.competent job.– Does not need to be bonded for faithful Does not need to be bonded for faithful

performance of its duties. performance of its duties. – Last forever.Last forever.– Charge fees.Charge fees.




Individual fiduciaries:Individual fiduciaries:– Do not last forever.Do not last forever.– May serve without fees.May serve without fees.– Have more knowledge about the business.Have more knowledge about the business.– Personally concerned for the well-being of the Personally concerned for the well-being of the

beneficiary.beneficiary.– Biased toward certain beneficiaries.Biased toward certain beneficiaries.



DUTIES OF TRUSTEES AND DUTIES OF TRUSTEES AND EXECUTORSEXECUTORS


Trustee’s duties:Trustee’s duties:– Is suppose to protect and preserve the trust Is suppose to protect and preserve the trust

corpus.corpus.– Make the assets productive.Make the assets productive.– Obligation to follow the terms of the trust.Obligation to follow the terms of the trust.– Duty of care.Duty of care.

Trustees must act with the care, skill, and prudence Trustees must act with the care, skill, and prudence of a businessperson managing his or her own of a businessperson managing his or her own property.property.




Trustee’s duties:Trustee’s duties:– Duty of loyalty.Duty of loyalty.

Not to take advantage of situations involving Not to take advantage of situations involving conflicts of interest.conflicts of interest.

To be as impartial as possible among beneficiaries.To be as impartial as possible among beneficiaries.

– Duty to diversify the types of investments.Duty to diversify the types of investments.– Duty to account.Duty to account.– Trustee must not mix personal funds with trust Trustee must not mix personal funds with trust

funds.funds.




Trustee’s duties:Trustee’s duties:– Trustee must not borrow money or mortgage Trustee must not borrow money or mortgage

trust property.trust property.– Trustee will have incidental authority to carry Trustee will have incidental authority to carry

out ordinary duties.out ordinary duties.

Executor’s duties parallel those of a trustee.Executor’s duties parallel those of a trustee.Both have fiduciary duties to beneficiaries.Both have fiduciary duties to beneficiaries.




Executor responsible:Executor responsible:– For filing estate and inheritance tax returns.For filing estate and inheritance tax returns.– Paying the applicable taxes.Paying the applicable taxes.– Filing accounts with probate court.Filing accounts with probate court.



IMPLIED TRUSTSIMPLIED TRUSTSIMPLIED TRUSTSIMPLIED TRUSTS

Implied trusts created by operation of law or Implied trusts created by operation of law or imposed by courts.imposed by courts.

Resulting TrustsResulting Trusts– Owner of property disposes of property but the Owner of property disposes of property but the

disposition is not complete.disposition is not complete.– Person purchases real property with his/her own money Person purchases real property with his/her own money

and puts title in name of another, without intending to and puts title in name of another, without intending to make a gift.make a gift.

– Resulting trust occurs only if the owner is acting in Resulting trust occurs only if the owner is acting in good faith.good faith.



IMPLIED TRUSTSIMPLIED TRUSTS

Constructive Trusts:Constructive Trusts:– An equitable remedy.An equitable remedy.– Arises by operation of law to redress a wrong Arises by operation of law to redress a wrong

or to prevent unjust enrichment.or to prevent unjust enrichment.– Created to correct unfair results.Created to correct unfair results.

CHAPTER 44 WILLS, ESTATES, AND TRUSTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and...

Documents

Transcript of CHAPTER 44 WILLS, ESTATES, AND TRUSTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and...