ACCT 5315 Estate and Gift Taxation

1. ACCT 5315Estate and Gift Taxation Introduction to wills, trusts, and other probate procedures

2. Wills • Generally, the most important instrument in estate plan • Will: written statement disposing of property at death executed by a person during life • A will is not operative until death, but is changeable during a testators life. • Who can make a will • anyone over 18 years old • Must be mentally competent @ time the will is executed • Cannot be under any duress or undue influence at the time the will is executed

3. Valid Wills • To be valid a will: • Must be signed. • States vary in level of witnesses needed • Many states require • Signature by the maker • and, 2 witnesses neither of which may have a financial interest in the estate. • If any of the witnesses are not valid the will technically does not exist. • Properly executed wills under one state are valid in all U.S. states and Possessions

4. Wills (continued) • Testator/testatrix: Persons who makes a will • Will provides how the testator’s property will be distributed • The will also names the person or institution who will carry out the will’s instructions (i.e. the executor/executrix) • If no executor/trix named, probate court will appoint an administrator/trix • Executor=testators personal representative

5. Wills - continued • Beneficiary - people named in the will to receive property. • If beneficiaries are not of legal age or incompetent • Probate court appoints a guardian ad litem (for the purpose of the probate proceedings) • Probate court can also appoint a guardian of the property (cares for the assets of the minor) • Probate court can also appoint a guardian of the person who cares for the personal attributes of the minor. • Generally these two guardians are the same person. • Parent - legal guardian of the person not necessarily the legal guardian of the property

6. Advantages of a Will • Designates who is to receive property and what property they are to receive • It also designates who receives property in the event that a beneficiary pre-deceases the decedent. • Will can be used to name the guardian of your children - however, can always reserves the right to name the person best for the childe • Names the executor/trix of the estate and can specify that a surety bond not be provided.

7. Disadvantages of dying intestate (i.e. without a will) • Property is distributed in accordance with the statutory scheme of intestate succession as determined by the state of domicile. • Court appoints administrator rather than decedent determining who he/she wanted. • Children’s guardians may not be the person the decedent’s wished, in particular if the desired guardian is not a direct family member.

8. Revocation of a Will • Destroy all copies of the will, or • Execute a new will including the terms: “By this will I revoke all prior wills” • Automatic Revocation - If married/divorced or have a child the will is automatically revoked unless specifically stated in the existing will that these events do not revoke the will.

9. Structure of the Last Will & Testament • Most will have the following components • Exordium Clause • Payments of Debts Clause • Payment of Taxes Clause • Disposition of Tangible Personal Property Clause • Disposition of Residential Real Estate Clause • Specific Bequests & Devises • Powers of Appointment Clause • Residuary Estate Clause

10. Structure of the Last Will & Testament (continued) • Disposition of Trust Assets Clause • Appointment of fiduciaries clause • Powers clause • Appointment of guardian clause • Common disaster clause • Survivorship Provision • Testimonium Clause • Attestation Clause

11. Exordium Clause • Identifies the testator • Declares domicile - avoids state conflicts • Declares instrument to be his/her last will and testament - negating prior wills • Specifically invalidates all prior testamentary instruments.

12. Payment of Debts Clause • Directs the payment by the executor of debts, funeral expenses, and the costs of administration • Directs the source from which such amounts are to be paid (usually from the residuary estate). • Establishes as debts any items which might not otherwise appear to be binding obligations of the testator (e.g., a loan from a child, business partner, etc.) • Covers explicitly the method of any payment of secured debts (e.g. whether a mortgage on improved real estate including the personal residence should be settled)

13. Payment of Taxes Clause • Establishes source of funds and allocation, if any, for the payment of death taxes. • Identifies all potential tax liabilities and allocates responsibility for these. • Identifies those bequests that may need to be specifically exempted from the tax allocation provision (marital assets) • Completes tax projection to prevent depletion of residuary estate. • Provides immunity from liability to the executor or trustee who exercises discretion in allocating taxes.

14. Disposition Of Tangible Personal Property / Residential Real Estate Clause • Provides for the disposition of specific TPP items (jewelry, artwork etc) • Can be used to recognize the community property interest of the surviving spouse in such property by indicating that one half of the TPP belongs to the spouse • Can be used to itemize separate property - confirming those items that are not community property items. • Residential Clause - can provide for a transfer of outright ownership or a life estate in the testator’s residential real estate. Guarantees that the property will be transferred to the appropriate person in the form desired.

15. Specific Bequests/Devises and Powers of Appointment Clauses • Specific Bequests / Devises • Designates specific items to go to certain beneficiaries • Items include, cash, stocks, other securities, TPP etc. • Powers of Appointment Clause - Provides for • an identification of the source and date of any power of appointment held by the testator, and the property subject to that power, and • the exercise, limited exercise, nonexercise or a statement of prior disclaimer of this power of appointment.

16. Residuary Estate Clause • Provides for the disposition of the residuary estate and can achieve the following • the outright disposition of all remaining assets • the transfer of all remaining assets to a testamentary trust • the transfer of all remaining assets to a previously created inter vivos trust • the maximum use of the unlimited marital deduction • disposition of the remaining community property including a widow’s election • the implementation of generation skipping transfer provisions in any testamentary trust.

17. Disposition of Trust Assets/ Appointment of Fiduciaries • Trust Disposition • Provides the terms for the retention, investment, and disposition of the income and corpus of marital and non-marital testamentary trusts. • Appointment of Fiduciaries • designates executor and trustees of testamentary trusts • waives the posting by the fiduciary of a bond to assure performance by the fiduciary • enables the payment of appropriate compensation to the fiduciaries.

18. Powers Clause • Vests authority in the fiduciary to deal to: • Retain, sell, lease property • investing and reinvesting estate assets/ managing real est. • consenting to corporate and partnership adjustments • allocating receipts and disbursements between princ./ int. • lending and borrowing funds, settling claims • exercising employee stock options / distributing property in kind / exercising other powers appropriate to a fiduciary • finding federal/state income tax returns

19. Other Clauses • Appointment of Guardian - • Designates the person to act as the guardian of person and property of any minor children when the decedent dies and the minor children have no surviving parent. • This designation may be done by a separate document. • Common Disaster Provision • Serves to indicate which spouse is deemed to survive if both spouse dies in a common disaster. This provision is for purposes of determining transfer of spousal assets..

20. Will Clauses Continued • Survivorship Provision - • Specify that beneficiaries must be living for a minimum of 30-60 days after the testator’s death to be treated as surviving the testator. Prevents double taxation. • Testimonium clause • Establishes that the testator executed the will with full knowledge and intent that it be his last will & testament • establishes the date of document and signs the doc. • Attestation Clause - Provides assurance with local laws regarding wills (e.g. witnesses etc.)