CHAPTER THREE – Structuring the Last Will

Purpose of this Ch. 3 analysis:  to understand the components of the “last will and testament.”

This is more than an exercise in mechanics – consider the relevance of each will provision for: (1) local property transfer purposes, (2) federal tax (income & transfer), and (3) other reasons?

Trusts and wills course:  a study of mistakes (!).

Estate planning course objective:  to avoid mistakes (i.e., litigation and malpractice risk).

What Happens When Intestacy?

State of Texas (or another state) provides for property distribution rules:

1)  Community property – all to surviving spouse, unless deceased has children other than with the survivor spouse.

2)  Separate property – with children surviving (a) personal property to spouse (1/3) and surviving children (2/3rds);  (b) real property – to children subject to life estate in 1/3^rd to surviving spouse;  (c) homestead rights.

Components of the Last Will – Structuring

What are the components of a last will?

 - Exordium clause.

 - Payment of debts and taxes.

 - Disposition of property

 - Powers of appointment (create? exercise?)

 - Disposition of the residuary estate

 - Powers clauses (for executor/trustee)

 - Appointment of appropriate fiduciaries

What is a “writing”?  Non-English language?

Supplemental Materials with sample will forms.

Exordium Clause
p.3

1)  To identify the testator

2)  To declare the domicile of the testator

3)  To declare “Last Will & Testament”;  possible exceptions when multiple jurisdictions (& multiple wills)?

4)  To invalidate prior testamentary documents (assuming a current document exists to be superseded); 

                cf., a “codicil” to a last will

Identifying Beneficiaries
p.4

Identify one’s spouse (e.g., recognize a common law marriage).

Identify children, including after-born children.

To identify other beneficiaries.

To specifically disinherit a beneficiary; what about the birth of a beneficiary after the testator’s death?  Cf., IVF?

(cf., treatment if intestacy were to occur).

Debts & Taxes          p.5

Debts:  Are they really debts?  Enforceable?

How allocate the responsibility for debts? What is the “abatement” process?

Taxes:  Identifying the death taxes.

How allocate taxes? Include an allocation provision in the Last Will?

What is the governing law for the allocation of federal/state tax liabilities?  See (1) Texas Probate Code §322A (cf., Uniform Estate Tax Apportionment Act);  or, (2) Federal tax allocation rules (next slide).  Is this (1) a “property law” or (2) a “tax law” question?

Federal Tax Allocation -  Reimbursement Rules

§2002 – taxes to be paid by executor

§2205 – reimbursement from estate

§2206 – insurance beneficiaries

§2207 – power of appointment

§2207A – marital deduction property

§2207B – retained interest property

Cf., proportionate vs. “stacking” allocation process.

Planner:  Make estate tax cost projections?

Allocation provision:  See p.9-10.

Disposition of Tangible Personal Property      p.10

How divide these assets among heirs?

What is the income tax basis for these items?

Is income tax incurred on the distribution of each asset from the estate? See §663(a)(1).

Provide a separate “Letter of Wishes”?  If so, is this a “testamentary instrument” (subject to local wills statutes)?

Recognize the community property interest of the surviving spouse?  Or separate property?

Disposition of Real Estate
p.11

How deal with the transfer of a client’s residential real estate?   Use the last will?

Including, when there exists a community property interest of the surviving spouse?

What treatment of any outstanding mortgage debt against this property?  Retain or satisfy the mortgage debt?

See Tx. Probate Code §37 re (all) property ownership vesting immediately upon death.  What is the significance of this provision for tax and estate administration purposes?

Power of Appointment Clause                       p.13

How determine the existence (and type) of a power of appointment held by the client? 

Is the power a special or general power?

Where created?  In what other documents?

Determine who are the “takers in default”?

Implement an exercise or a non-exercise? 

How mechanically exercise the P/A, if desired?

What effect of the residuary clause in the client’s will in exercising P/A?  Include a specific provision in the will that any P/A held is not exercised?  See Probate Code §58c.

Disposition of the Residuary Estate        p.14

Alternatives for disposition of the residuary estate (after all specific bequests):

1) Outright transfers to the beneficiaries

2) Testamentary trust for the beneficiaries

3) To an existing revocable trust;  is a “pourover permitted” from the estate/will to a pre-existing (then irrevocable) trust?

4)  Special receptacles for the residuary estate:  (a) marital deduction trust, and (b) credit shelter trust.

Appointment of Executor & Trustee                  p.16

Designation of the executor (& successors).  What legal qualifications are necessary for the executor?  Tx. Probate Code §78.

What family/psychological considerations?

Waive security bond for the executor?  Why?

Payment of any compensation to the executor?  How determine the amount?

Appoint special executor, i.e., for some assets?

What/who is an “independent administration”?   See Tx. Probate Code §145.

Administrative Powers
for Executor/Trustee  p.18

Property management, including investments (Prudent Investor).  Unproductive property?

How allocate receipts and disbursements to principal and income (P&I)?

Distribute property “in kind” to beneficiaries?  What if varying income tax bases?

File a joint federal income tax return with a surviving spouse?  What are the risks to either party on the joint return?  Is innocent spouse relief available?

Testimonium Clause
p.21

How execute the Last Will?

What signing ceremony procedure should be used (and any special precautions)?

How prove and document the mental capacity of the testator at the time of the will signing?

Use extra precautions?  E.g., videotape?

Attestation clause (i.e., “self-proving  clause”); what is its function?  Tx. Probate Code §59.

Include a “No Contest Clause”                       p.22

Include a “no contest” clause, i.e., that a beneficiary shall take nothing if contesting the validity of the will?  What if statement that beneficiary “will take unless contesting”?

What is the effect if contesting party seeking larger amount loses?  Still entitled to the bequest if the challenge was reasonable?

If disinheriting someone who is “natural object of one’s bounty” provide (1) $1 or (2) an explicit statement that the person is being disinherited?

Will Safekeeping
p.23

How keep the executed will (and other documents) safe?

Keep in one’s personal safe deposit box?  Any other person having access to safe deposit box?

Is a bank safe deposit box frozen after death?

Leave the executed will with the estate planning attorney for retention and safe-keeping? What if the attorney retires?

Execute multiple copies and place copies in different locations?

Other Will Formats
p.24

1)  Joint & mutual will

See Texas Probate Code, §59A, for explicitly stating that a contract to make a will exists;  otherwise, no contract.  What if husband and wife executing wills at the same time?

2) Holographic will, Texas Probate Code, §60, recognizes validity of a will “written wholly in the handwriting of the testator.”   This will can be self-proved with an affidavit. 

Ancillary documents
p.25

1) Durable Power of Attorney – (next slide)

2) Revocable (or “living”) Trust Agreement

3) Appointment of one’s own guardian – cf., court proceeding – see Probate Code §679.

4) Living will (Physician’s Directive)

5) Medical Power of Attorney (representative for one’s medical affairs is appointed).

6) Anatomical gifts – how document to enable a prompt “organ harvesting”?

7) Appointment of guardian for client’s children (not in derogation of rights of surviving parent).

8) Trust/safekeeping for pets?

Durable Power of Attorney
p.26

What is the governing law for a P/A?       P.47.

Why a “durable” power?  Attorney-in-fact (and not an attorney-at-law).

See statutory form for P/A in Appendix, P.50.

When make a P/A effective?  Immediately or a springing power?  P.51.

Record the P/A in any official records; necessary for real estate transactions? 

Are gifts permitted to be made by the attorney-in-fact?  P.51.  What type/size of gifts? 

Other Documents

1)   Revocable “pour-over”, intervivos trust

• Appointment of guardian for oneself

• Appointing Guardian for Minor Children – include this in the Last Will?

• Living Will – Directive to Physicians

                See Tx. Health & Safety Code provisions

5)   Medical Power of Attorney – also Tx. Health & Safety Code

Unique (?) Considerations re Asset Transfers

Post death care for client’s pets – create a special trust?  Who is the guardian?

Computer passwords and electronic access – deposit this information with a special independent provider?.

Frequent flyer miles.

Anatomical gifts.  How document?

Federal Income Status of A Probate Estate?

A decedent’s estate exists as a separate taxpayer for federal income tax.

Effect of Texas Probate Code §37 when property vests – does income from the vested property bypass the probate estate?

How long continue the estate as a taxpayer? Objective to have multiple taxpayers for federal income tax?

How much real benefit from the bracket ladder?