Chapter 26


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Chapter 26

  1. 1. Jane P. Mallor A. James Barnes Thomas Bowers Michael J. Phillips Arlen W. Langvardt Business Law and the Regulatory Environment Concepts and Cases Eleventh Edition
  2. 2. Estates and Trusts Chapter 26
  3. 3. The Law of Estates and Trusts <ul><li>Each state has its own statutes and common law regulating the distribution of property upon death. </li></ul><ul><ul><li>The Uniform Probate Code has been adopted in 18 states. </li></ul></ul>
  4. 4. Estate Planning <ul><li>Estate – all of the property owned by a person. </li></ul><ul><li>Estate planning – the process of planning for the transfer of a person’s estate later in life and at death. </li></ul>
  5. 5. Wills <ul><li>Testator – person making a will. </li></ul><ul><li>Will – a document executed with specific legal formalities that contains instructions about the way a person’s property will be disposed of at her death. </li></ul>
  6. 6. Right of Disposition by Will <ul><li>Each state has statutes that establish the requirements for a valid will. </li></ul>
  7. 7. Nature of a Will <ul><li>A will can only dispose of property belonging to the testator at the time of his death. </li></ul>
  8. 8. Nature of a Will <ul><li>Will substitutes – insurance policies and joint tenancy with right of survivorship are ways of directing disposition of property at time of death. </li></ul>
  9. 9. Common Will Terminology <ul><li>Bequest or legacy – a gift of personal property or money. </li></ul>
  10. 10. Common Will Terminology <ul><li>Ademption – a bequest of specific property that is destroyed or is disposed of by the testator before death is ineffective. </li></ul>
  11. 11. Common Will Terminology <ul><li>Devise – a gift of real property. </li></ul><ul><li>Residuary – the balance of the estate that is left after specific devises and bequests are made by will. </li></ul>
  12. 12. Common Will Terminology <ul><li>Issue – a person’s lineal descendants and adopted children. </li></ul>
  13. 13. Common Will Terminology <ul><li>Per capita – each person in a group will share a gift equally. </li></ul><ul><li>Per stripes or right of survivorship – the surviving descendants divide the share that their parents would have taken if the parent survived. </li></ul>
  14. 14. Testamentary Capacity <ul><li>Testamentary capacity – the legal capacity to make a will. </li></ul><ul><li>A person must be of sound mind and of legal age. </li></ul>
  15. 15. Testamentary Capacity <ul><li>To be of sound mind, the testator only needs to: </li></ul><ul><ul><li>Understand the nature and character of his property. </li></ul></ul><ul><ul><li>Realize he is making a will. </li></ul></ul><ul><ul><li>Know the persons who would normally be the beneficiaries of his affection </li></ul></ul>
  16. 16. Testamentary Capacity <ul><li>Fraud and undue influence are common grounds for challenging the validity of a will. </li></ul>
  17. 17. Execution of a Will <ul><li>A will is void unless it is executed with the formalities required by state law. </li></ul>
  18. 18. Execution of a Will <ul><li>Although the formalities required for a valid will vary from state to state, there are some common features: </li></ul><ul><ul><li>A will must be in writing. </li></ul></ul><ul><ul><li>A will must be witnessed by two or three disinterested persons. </li></ul></ul><ul><ul><li>A will must be signed by the testator. </li></ul></ul>
  19. 19. Incorporation by Reference <ul><li>The contents of extrinsic documents can essentially be incorporated into a will if: </li></ul><ul><ul><li>It was in existence at the time the will was executed. </li></ul></ul><ul><ul><li>The will and the extrinsic document refer to each other. </li></ul></ul>
  20. 20. Informal Wills <ul><li>Some states recognize certain types of wills that are not executed with statutory formalities. </li></ul>
  21. 21. Informal Wills <ul><li>Noncupative will – an oral will. </li></ul><ul><li>Holographic will – a will written and signed in the testator’s handwriting. </li></ul>
  22. 22. Joint and Mutual Wills <ul><li>Joint will – a single instrument that constitutes the will of both or all of the testators and is executed by both or all. </li></ul><ul><li>Mutual wills – joint or separate wills that reflect the common plan of distribution. </li></ul>
  23. 23. Construction of Wills <ul><li>courts will examine the entire instrument to determine the testator’s intent in cases where there are questions concerning the meaning or legal effect of a term or provision in a will. </li></ul>
  24. 24. Limitation on Disposition by Will <ul><li>A person who takes property by will takes it subject to all outstanding claims against the property. </li></ul>
  25. 25. Limitation on Disposition by Will <ul><li>In most states, the testator’s surviving spouse has statutory rights in property owned solely by the testator that cannot be defeated by a contrary will provision. </li></ul>
  26. 26. Limitation on Disposition by Will <ul><li>At common law, a widow had dower rights and a widower had curtesy. </li></ul><ul><ul><li>Dower right or curtesy – the surviving spouse’s right to a life estate in one-third of the lands owned by the decedent during the marriage. </li></ul></ul>
  27. 27. Limitation on Disposition by Will <ul><li>Unless there is evidence to the contrary, there is a presumption that the testator intended to provide for pretermitted children. </li></ul><ul><ul><li>Pretermitted children – testator’s children who were born or adopted after the will was executed.. </li></ul></ul>
  28. 28. Revocation of Wills <ul><li>A will is revocable until the moment of the testator’s death. </li></ul>
  29. 29. Revocation of Wills <ul><li>Wills can be revoked by: </li></ul><ul><ul><li>Physical destruction or mutilation. </li></ul></ul><ul><ul><li>Crossing out the will or creating a document that expressly cancels it. </li></ul></ul><ul><ul><li>Execution of a later valid will that expressly or impliedly revokes the earlier will. </li></ul></ul><ul><ul><li>Marriage or divorce of the testator in some states. </li></ul></ul>
  30. 30. Codicils <ul><li>Codicil – an amendment to a will. </li></ul><ul><li>The same formalities required for a valid will are required to make a codicil valid. </li></ul>
  31. 31. Advance Directives: Planning for Disability <ul><li>Advance directive – a written document that directs others how future health care decisions should be made if the individual becomes incapacitated. </li></ul>
  32. 32. Living Wills <ul><li>Living will – document in which a person states in advance his intention to forgo or obtain certain life-prolonging medical procedures. </li></ul>
  33. 33. Durable Power of Attorney <ul><li>Durable power of attorney – a document that gives another person the legal authority to act on one’s behalf in the event of mental or physical incapacity. </li></ul><ul><ul><li>Principal – the person who grants the power of attorney. </li></ul></ul><ul><ul><li>Attorney in fact – the person to whom the power of attorney is given. </li></ul></ul>
  34. 34. Durable Power of Attorney for Health Care <ul><li>The principal specifically gives the attorney in fact the authority to make certain health care decisions for him should he become incompetent. </li></ul>
  35. 35. Federal Law and Advance Directives <ul><li>The Patient Self-Determination Act requires health care providers to take active steps to educate people about the opportunity to make advance health care decisions. </li></ul>
  36. 36. Intestacy <ul><li>Intestacy – when a person dies without a will or the will she makes is invalid. </li></ul><ul><li>Intestacy or intestate succession statute – statutory provision for distribution of the intestate’s property. </li></ul>
  37. 37. Intestacy <ul><li>The intestate’s real property is distributed according to the intestacy statute of the state in which the property is located. </li></ul>
  38. 38. Intestacy <ul><li>The intestate’s personal property is distributed according to the intestacy statute of the state in which he was domiciled at the time of his death. </li></ul>
  39. 39. Characteristics of Intestacy Statutes <ul><li>The purpose of an intestacy statute is to distribute property in a way that reflects the deceased’s presumed intent. </li></ul>
  40. 40. Characteristics of Intestacy Statutes <ul><li>Such statutes generally provide for the distribution of property in this order: </li></ul><ul><ul><li>First to spouse and children; if not alive </li></ul></ul><ul><ul><li>Then to grand children; if not alive </li></ul></ul><ul><ul><li>Then to parents and siblings; if not alive </li></ul></ul><ul><ul><li>Then to nieces and nephews; if not alive </li></ul></ul><ul><ul><li>Then to grandparents, uncles, aunts, or cousins. </li></ul></ul>
  41. 41. Characteristics of Intestacy Statutes <ul><li>The estate escheats (goes) to the state if the deceased has no surviving relatives. </li></ul>
  42. 42. Special Rules <ul><li>A person must have a blood or marriage relationship with the deceased in order to inherit any part of the property. </li></ul><ul><li>Adopted children are treated in the same way as biological children. </li></ul>
  43. 43. Special Rules <ul><li>Illegitimate children inherit from their mothers but not their fathers unless paternity is established. </li></ul>
  44. 44. Special Rules <ul><li>A person must be alive at the time of the decedent’s death in order to claim a portion of the estate. </li></ul>
  45. 45. Simultaneous Death <ul><li>Under the Uniform Simultaneous Death Act, when it is difficult to determine which of two persons who would inherit from each other died first, each person’s property is distributed as though he or she survived. </li></ul>
  46. 46. Administration of Estates <ul><li>Administrative process or probate process – the orderly procedure under court supervision to collect the deceased’s property, settle her debts, and distribute the remaining property to his heirs. </li></ul>
  47. 47. The Probate Estate <ul><li>The probate process only operates on the decedent’s property that is part of his probate estate . </li></ul>
  48. 48. The Probate Estate <ul><li>The following is not considered part of the probate estate: </li></ul><ul><ul><li>Joint ownership property with right of survivorship. </li></ul></ul><ul><ul><li>Insurance policies payable to a trust or third party. </li></ul></ul><ul><ul><li>Revocable trust in which a third party is beneficiary. </li></ul></ul><ul><ul><li>Retirement benefits </li></ul></ul>
  49. 49. Determining the Existence of a Will <ul><li>The first step in the probate process is to determine whether the decedent left a will. </li></ul>
  50. 50. Determining the Existence of a Will <ul><li>A will must be proved to be admitted to probate. </li></ul><ul><ul><li>Self-proving affidavit – a declaration under oath signed by the testator and the witnesses the will at the time it was executed. </li></ul></ul>
  51. 51. Selecting a Personal Representative <ul><li>Another early step in the administration of the estate is the selection of a personal representative to administer the estate. </li></ul>
  52. 52. Selecting a Personal Representative <ul><li>Executor – the personal representative under a will. </li></ul><ul><li>Administrator – the personal representative in an intestate estate. </li></ul>
  53. 53. Responsibilities of the Personal Representative <ul><li>Inventory and appraise the assets of the estate. </li></ul><ul><li>Give notice to the creditors and potential claimants against the estate. </li></ul><ul><li>See that creditors’ claims are satisfied. </li></ul>
  54. 54. Trusts <ul><li>Trust – a legal relationship in which a person who has legal title to property has the duty to hold it for the use and benefit of another. </li></ul>
  55. 55. Nature of a Trust <ul><li>The person benefited by a trust is considered to have equitable title to the property. </li></ul>
  56. 56. Nature of a Trust <ul><li>A trust may be created by: </li></ul><ul><ul><li>A declaration by the property owner. </li></ul></ul><ul><ul><li>Operation of law. </li></ul></ul><ul><ul><li>Express instruments. </li></ul></ul>
  57. 57. Trust Terminology <ul><li>Settlor or trustor – the person who creates the trust. </li></ul><ul><li>Trustee – the person who holds the property for the benefit of another person. </li></ul><ul><li>Beneficiary – the person for whose benefit the property is held in trust. </li></ul>
  58. 58. Trust Terminology <ul><li>Corpus or res – the property held in trust. </li></ul><ul><li>Inter vivos trust – one established and effective during the settlor’s lifetime. </li></ul><ul><li>Testamentary trust – one that takes effect only at the death of the settlor.. </li></ul>
  59. 59. Why People Create Trusts <ul><li>Tax benefits – some types of trusts have income or estate tax advantages. </li></ul><ul><li>Privacy – property passed by trust are not part of the probate estate. </li></ul>
  60. 60. Why People Create Trusts <ul><li>Control – the settlor has more control over the use of the property after death than does a will. </li></ul>
  61. 61. Creation of Express Trusts <ul><li>There are five requirements for the creation of a valid express trust. </li></ul>
  62. 62. Creation of Express Trusts <ul><li>Capacity – the settlor must have the same legal capacity to make a contract or a will. </li></ul>
  63. 63. Creation of Express Trusts <ul><li>Intent and formalities – the settlor must intend to create a trust and follow the the appropriate statutory formalities. </li></ul>
  64. 64. Creation of Express Trusts <ul><li>Conveyance of specific property – the settlor must convey the property to the trust. </li></ul>
  65. 65. Creation of Express Trusts <ul><li>Proper purpose – a trust may not be created for a purpose contrary to public policy. </li></ul>
  66. 66. Creation of Express Trusts <ul><li>Identity of the beneficiaries – the beneficiaries must be described clearly enough so that their identities can be ascertained. </li></ul>
  67. 67. Charitable Trusts <ul><li>Charitable trusts – created to benefit a charitable organization or for some purpose beneficial to society. </li></ul>
  68. 68. Charitable Trusts <ul><li>Unlike a private trust, a charitable trust is valid even though the beneficiary may not be ascertained at time of creation and it is to continue for an indefinite period. </li></ul>
  69. 69. Doctrine of Cy Pres <ul><li>A charitable trust does not fail in the event the charitable purpose becomes impossible, impracticable, or illegal. </li></ul><ul><ul><li>A court will direct the property to some charitable purpose that falls within the settlor’s general charitable intention. </li></ul></ul>
  70. 70. Totten Trusts <ul><li>Trotten trust – a deposit of money in a bank or other financial institution in the name of the name of the depositor as trustee for a named beneficiary. </li></ul>
  71. 71. Powers and Duties of the Trustee <ul><li>The trustee must use a reasonable degree of skill, judgment, and care in the exercise of her duties. </li></ul><ul><ul><li>The trustee is held to a higher standard if the trustee holds herself out as have a greater degree of skill. </li></ul></ul>
  72. 72. Powers and Duties of the Trustee <ul><li>The trustee owes a duty of loyalty by administering the trust for the benefit of the beneficiaries and not his own. </li></ul>
  73. 73. Allocating Between Principal and Income <ul><li>One of the duties of the trustee is to distribute the principle and income of the trust in accordance with the terms of the trust instrument. </li></ul>
  74. 74. Allocating Between Principal and Income <ul><li>The trustee must balance the interests of income beneficiary and the remainderman. </li></ul>
  75. 75. Liability of Trustee <ul><li>A trustee may incur personal liability for breaching the duties of a trustee or for conduct falling below the appropriate standard of care. </li></ul>
  76. 76. Liability of Trustee <ul><li>A trustee may also be liable to third parties who are injured by the operation of the trust. </li></ul>
  77. 77. Spendthrift Trusts <ul><li>Spendthrift trust – contains a clause which restricts the voluntary or involuntary transfer of the beneficiary’s interest. </li></ul>
  78. 78. Spendthrift Trusts <ul><li>A spendthrift clause in not effective when the settlor makes himself the beneficiary. </li></ul>
  79. 79. Spendthrift Trusts <ul><li>Divorced spouses and minor children of the beneficiary can compel payment for alimony and child support. </li></ul>
  80. 80. Spendthrift Trusts <ul><li>Creditors who have furnished necessaries can compel payment. </li></ul>
  81. 81. Spendthrift Trusts <ul><li>The property can be subject to creditor claims once the trustee distributes it to the beneficiary. </li></ul>
  82. 82. Termination and Modification of a Trust <ul><li>Normally, a settlor cannot modify or revoke a trust unless he reserved the power to do so. </li></ul>
  83. 83. Termination and Modification of a Trust <ul><li>A trust may be modified or terminated with the consent of the settlor and all of the beneficiaries. </li></ul>
  84. 84. Implied and Constructive Trusts <ul><li>The law implies or imposes a trust even though no express trust exists or an express trust exists but has failed. </li></ul><ul><ul><li>Resulting trust – arises when there has been an incomplete disposition of trust property. </li></ul></ul>
  85. 85. Implied and Constructive Trusts <ul><li>Constructive trust – created by law to avoid fraud, injustice, or unjust enrichment. </li></ul>
  86. 86. Estates and Trusts End of Chapter 26
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