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Estate Law

Estate Planners | Tuesday, September 21st, 2010

Estate law deals with a person’s property. An estate is simply the net worth of an individual. To calculate a person’s net worth, find out how much his assets are worth and how many liabilities he has. Subtract the liabilities from the assets to arrive at net worth. For example, Jack’s assets are $3,500 in a savings account, a house worth $93,500, and a car worth $3,500. Jack still owes $25,000 on his house mortgage and $500 on his car loan. Jack’s net worth would be $100,500 of assets minus $25,500 of liabilities, so his net worth would be $75,000. If Jack passed away, he would leave behind $75,000 worth of assets.

Estate law is a very broad subject that is quite complicated. Some attorneys specialize in different subjects of estate law and devote their practices to well-defined areas within the estate law category. Estate law encompasses the management of property and assets both during a person’s lifetime and after his death. The most commonly known areas of estate law are wills and trusts which will be covered in this article.

Wills

Wills are the most commonly recognized form of estate law. A will is a disclosure by a living person describing what the person wants to happen to his assets and property after his death. The person can generally dispose of his property any way he chooses. If the person is married, all property can be left to the spouse or not, or the property can be left to a person or organization. Different parts of property can be left to different persons or organizations. Wills describe how the deceased would like for his assets to be transferred to others when he dies.

The term for a male person who writes a will is testator and the feminine is testatrix. A person who dies who has written a will is said to have died testate, while a person who dies without leaving a will has died intestate. As you can probably imagine, dying without a will makes the final disposition of an estate much more complicated.

To carry out the terms of the will, a person is designated either in the will or by the court. If named in the will the person is called an executor or executrix. If not named by the will, the court will appoint an administrator or adminstratrix.

Not everyone can make a will. In estate law, only those who have testamentary capacity can make a will that will be enforceable by courts of law. Only those with testamentary capacity can make a valid will. There are generally three elements that the court will use to determine whether the person who made a will had testamentary capacity:

  1. Age
  2. Mental Capacity
  3. Sound and Disposing Mind

Age

In most jurisdictions, estate law requires the person making the will to be a certain age before the court will recognize the will. The age varies among the states, but the age is generally either eighteen or twenty-one.

Mental Capacity

Mental capacity refers to a person’s ability to understand what he is doing when making a will. If a person is of low mental ability then the person most likely cannot understand what it means to make a will, and the person may not even understand what death is. As a result, in estate law a person must be able to understand the full implications of what he is doing when making a will and understand the connection among death, his property and the people he designates as his heirs.

Elements to a Will

Estate law requires several things for a valid will. The will should be written (except in very stringent cases of nuncupative wills, see below). It can be written on nearly any type of surface as long as it is legible. The testator must identify himself, specify that this document is his last will and testament and revoke any previous wills and codicils. The testator must state that he is of sound mind and body to dispose of his property. The testator must sign the will or direct another person to sign for him if the testator cannot sign for himself. The testator must sign the will in the presence of witnesses or present an already signed will to witnesses and declare to them that the testator was the one whose signature appears on the will. They must also sign the will and may be called into court to testify that they did indeed witness the testator sign the will.

Types of Wills

There are several different types of wills, and depending on the jurisdiction, one or more of various types of wills may or may not be recognized.

In estate law, a holographic will is written without witnesses, so the only signature on the will is the testator’s. Lacking witnesses can cause problems in the probate of the will, although some jurisdictions do recognize holographic wills.

An oral/nuncupative will is made on the deathbed of the testator in the presence of witnesses, and it only applies to personal property, not to real property. Depending on the jurisdiction, a nuncupative will may or may not be recognized as valid.

A joint will is one document that contains the will of more than one person, usually a husband and wife. The couple makes one will instead of having two separate wills.

With medical advances, estate law has begun recognizing living wills. A living will is triggered by an event other than death, so it becomes active before the testator dies, unlike all other forms of will that are conditioned on the death of the testator. This type of will activates if the testator becomes incapacitated or unconscious and can no longer communicate his wishes regarding his healthcare. A living will describes various actions to take if certain conditions are present. It is most often used to explain the circumstances when the testator would wish to remain on life support or when he would prefer to die a natural death.

The laws governing the will of a member of the armed forces or mariners are generally more relaxed than wills for ordinary citizens. Since they may be outside the country or in a war zone at the time they write the will, informal documents may be permitted in probate.

A codicil is an amendment to an existing will which alters or adds to the wishes expressed in the existing will. A codicil allows a person to change his will without having to write an entirely new will.

Revocation of Wills

Estate law allows a testator to revoke an existing will and make a new one if he so desires. Revocation simply means disavow an already existing will so that all or part of the will no longer be applicable when the testator dies. The testator can achieve this by physically destroying the will or by marking out sentences or sections of the will. The testator may also write a completely new will and indicate in it that all previous wills are superseded by the most recent one. A codicil to an existing will can also be issued, which is basically an amendment with further instructions.

Probate of a Will

In estate law, probate is the process of presenting a will to a court of law, settling the estate of the testator, and distributing the remaining estate assets according to the provisions of the will. Testators usually name an executor in the will. This is a person whom the testator wants to carry out the probate process. If no executor is named, the court will appoint one.

The first step in probate is providing proof that the will is valid. When this is established, the executor is named and a notice to creditors is issued, usually in local newspapers. The executor then conducts an inventory of the testator’s assets and then proceeds to dispose of the assets in accordance with the will and pay any debts owed by the testator. After all this has been finalized and the court provided with evidence that the wishes of the testator have been met, a final decree of the court will end the probate process and the estate will be closed.

However, probate can be more complicated if there are any disputes over the terms of the will or large outstanding debts owed by the testator. Complications can cause probate to extend for a long period of time. However, proper estate planning by the testator can to some extent prevent probate from becoming convoluted and burdensome on the executor and heirs.

Intestate Succession

If the deceased has no will, estate law deems that he has died intestate and the common law of intestate succession determines who will inherit his property. The general rule is that if the deceased has a living spouse, the spouse inherits all of his estate. If there are minor children, the spouse will receive their shares as well. If there is no spouse or children, the deceased parents receive his estate. If the parents are also deceased, then the estate will go to any siblings. Adopted children are recognized in the same way as natural children in intestate succession.

These are general rules, but intestate succession laws can become very convoluted depending on the number of potential heirs. Dying intestate can be a great burden on family at an already trying time, so proper estate planning ahead of time is the best way to prevent this situation from occurring.

Contesting a Will

In estate law if a will is contested, it is challenged in court as misrepresenting the true wishes of the testator. There are generally four bases for contesting a will:

  1. Testamentary Capacity
  2. Undue Influence
  3. Insane Delusion
  4. Fraud

Testamentary Capacity refers to the legal and mental ability of a person to execute a valid will. Since estate law presumes that adults have the necessary understanding to make a will, insanity is the typical objection to an adult’s ability to possess testamentary capacity when the will was made. To establish testamentary capacity, the testator must know what his property encompassed, know the value of the property, know whom he named as beneficiaries, understand how the property will be distributed and connect these four elements in his mind as how to dispose of his estate. It is rather hard under estate law to prove that an adult lacked testamentary capacity unless the person had previously been declared insane by a court of law.

Undue influence refers to an advisor taking advantage of the testator because of their relationship provided power over the testator, thereby preventing the testator’s from acting independently. The advisor enriches himself by taking advantage of the testator. For example, the advisor convinces the testator to leave his entire estate to the advisor when in fact the testator truly wanted to leave it to his children. If the advisor had not pressured the testator, the testator would have left his estate to his wife, so the advisor personally benefited from his position.

Insane Delusion is when a testator does not comprehend reality and acts contrary to reality. For example, if a man has a child that he has raised, but in his will claims he has no children and so leaves his estate to a non-relative, the man is clearly deluded about the existence of his child.

Fraud is an advisor taking advantage of the testator in order to enrich some third party. It is similar to undue influence except with fraud the beneficiary is not the advisor. For example, the advisor colludes with distant cousins of a wealthy man by convincing the man to leave his estate to these cousins instead of to his wife.

Trusts

Trusts are the second major component of estate law. Trusts are established when the owner of property wants to relinquish title to the property in exchange for others’ managing the property for the benefit of a third party. There are several terms necessary to understand when discussing trusts in estate law.

The settlor is the person who owns the property transferred into the trust. Settlors can also be known as trustor, creator, or grantor. Settlors make the initial decision to establish a trust.

Trust property is the term for the assets that the settlor puts into a trust. Trust property can include real estate, personal property, bank accounts, insurance policies, patents, copyrights, stocks, bonds, and many other types of property. Trust property is also called trust corpus.

Beneficiaries are the people or cause or organization for whom the settlor creates the trust. There can be one or more beneficiaries to a given trust.

Trustees are the people to whom the settlor transfers title of the trust property. Trustees manage the trust property in the best interests of the beneficiaries of the trust. Beneficiaries receive payments from the earnings of the trust. Trustees can be individuals or a legal entity such as a corporation. Trustees have a tremendous amount of responsibility since they are managers of the property in the trust. The relationship between trustees and beneficiaries is considered a fiduciary relationship.

The fiduciary duties of trustees are extremely important. Trustees should be chosen based on their honesty and integrity since they will take title to the trust assets. Generally, trustees are compensated for their services by the trust. Trustees must carry out the intentions of the trust, competently and discerningly invest the trust assets so that the beneficiaries will receive income from the trust, and not manage the trust for their own personal gain at the expense of the beneficiaries’ interests. Trustees must also be accountable for their decisions to the beneficiaries and be impartial.

Creation of Trusts

Trusts are usually created in one of four ways. The trust can be oral, but usually it is formalized by a written document detailing the settlor’s intentions for setting up the trust, describing the property put into trust, and naming the trustees and beneficiaries. A trust can also be created in a person’s will, or a court order can establish a trust.

Elements of a Trust

There are four elements to a trust:

  1. Trust Intent of Settlor
  2. Trust property
  3. A Trustee
  4. A beneficiary

The settlor must definitely intend to establish the trust for beneficiaries and demonstrate that he was of sound mental capacity to understand that he was transferring his rights to the property to the trustee. Trust property is the assets that the settlor gives up to the trustee for the trustee to manage. The trustee oversees the investment decisions of the trust property and the beneficiary receives payments from the trust.

Trust intent means that the settlor must have the legal right to the property that is to be transferred to the trustee. The property transferred to the trustee is referred to as trust property and can consist of real or personal property. Houses, bank accounts, and stocks are all examples of property that can be put in a trust. The trustee receives the title to trust property from the settlor and agrees to manage trust property for the beneficiary. The trustee must act with due diligence and good faith in managing the trust and carrying out business in the best interests of the beneficiary. The beneficiary is the owner of the trust’s equity. As such, the beneficiary is entitled to receive money from the trust. The beneficiary can be a person, animal, or an organization.

Types of Trusts

In estate law there are many types of trusts, so this is not meant to be a comprehensive listing of all the trusts found in estate law. However, these are the more common types of trusts found and a brief description of each.

An Inter Vivos Trust is a trust from which the beneficiary receives benefits during the lifetime of the settlor. The settlor sets up the trust while living.

If the beneficiary does not receive any benefits from the trust until the settlor dies, the trust is a Testamentary Trust. These trusts take effect when the settlor dies.

A Revocable Trust is one in which the settlor has the option to dissolve the trust. The settlor will then be able to regain title to the property put into trust and the beneficiary will no longer receive any payments since the trust will cease to exist. The settlor will be able to revoke the trust even if the beneficiaries object to the revocation.

An Irrevocable Trust is one in which the settlor gives up this right to revoke the trust. In this case, the trust can only be revoked either if all settlors and beneficiaries agree to revoke it or if a court orders the trust to be revoked.

A Savings Account/Totten Trust is a bank account that the settlor wants to pass to a beneficiary when he dies. The account or accounts designated in trust will not be subject to probate and therefore even if the settlor dies without a will, the accounts will still pass to the beneficiary and not be subject to probate.

A Real Estate Investment Trust or REIT is set up to manage real estate and real estate loans for beneficiaries. This type of trust is different from other trusts because it falls under the jurisdiction of the Securities Act of 1933. Also, there must be at least 100 beneficiaries to a REIT.

A Spendthrift Trust is created for beneficiaries who are very bad at managing their own money. The beneficiary can never receive any of the principal from trust property, only earnings made on the principal. Also, trust property is protected from the beneficiary’s creditors since the spendthrift beneficiary is likely to run up debts above and beyond his means. This prevents the spendthrift from losing everything since the trustee has great power in determining when and on what conditions the beneficiary will receive money from the trust.

A Charitable Trust is set up to fund particular causes. One person is not the beneficiary of a charitable trust. Instead, the trust benefits such things as religion, education, or cancer research.

In a Fixed Trust, the beneficiary receives a specific amount of money after a certain event has occurred. The settlor determines the amount and circumstances of the payment to the beneficiary, so the trustee has little or no say in the matter. A common example is that Ann’s grandparents set up a fixed trust for her. Their terms are that when Ann reaches age 21, she will receive money from the trust.

A Discretionary Trust is one where the settlor establishes criteria whereby the named beneficiaries will become eligible to receive money from the trust. The criteria can be any that the settlor chooses, so if the beneficiaries do not meet the criteria they will not receive any benefits from the trust.

A Bare/Simple Trust is one in which the beneficiary can claim both the earnings and trust property at any time. As a result, the beneficiary can take title to the property in the trust and the trustees have to act according to the beneficiary’s directions.

In a Life Insurance Trust, trust property is a life insurance policy held by the settlor. When the settlor dies, the proceeds from the life insurance policy go to the beneficiaries of the trust without having to go through probate, so no estate tax will be owed on the policy.

As you can see, estate law is a large body of rules governing the net worth of an individual both during his lifetime and after his death. Attorneys specialize in estate law and spend their careers practicing in this one area. Estate law covers the area of estate planning, so to ensure that your estate is handled properly consider engaging the services of an estate planner to help you navigate the intricacies of estate law.

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