6. Essential Elements & Special Provisions in Wills & Trusts Flashcards
The key language components in drafting a Will or Trust
-Name and domicile (critical in determining the validity of the document and where it is likely to be enforced)
-Identification of family members (living and deceased, and designated to take from the estate or be disinherited)
-Payment of expenses, debts and taxes (often from the residuary estate)
General dispositive provisions: Specific Gifts and Personal Property
The Will or Trust must clearly identify property being disposed of and intended beneficiaries.
If a specific item has been sold between writing and death, there is no “make-up.”
General dispositive provisions: Predeceased heirs
Trust or Will should name alternate beneficiaries. Otherwise, under common law, the gift would become part of the residuary estate or (under the applicable anti-lapse statute) pass to the beneficiary’s heirs, neither of which the client may want.
General dispositive provisions: Disinheriting a beneficiary
If the client intends to disinherit a child, they should expressly and emphatically state their intention to do so.
No-contest provisions are commonly used in conjunction with a disinheritance provision to discourage the contest of a Will or Trust (causing that beneficiary to lose any interest if they contest the document).
General dispositive provisions: Tangible Personal Property and Income Taxes
A Will or Trust should provide for the disposition of tangible personal property separately from residue. Under IRC 663, distributions (whether in cash or in kind) to residuary beneficiaries during the administration of an estate will cause income of the estate to be taxable to them.
The Will or Trust should make it clear the associated income taxes will be assessed to those beneficiaries and not to the residuary estate.
General dispositive provisions: Powers of Appointment
Allow an appointed person to elect who is to receive a distribution at a later time, which gives the Will or Trust maker more nuanced and flexible planning for the disposition of property should certain events or circumstances occur. (Can be General or Special/Limited)
It is an irrevocable gift, so the donee and their lawyer/financial advisor should determine whether to accept the gift and exercise the power considering both the tax implications of an acceptance and the consequences of not accepted.
Because an irrevocable gift, typically reciprocal Powers of Appointment are not written into Wills or Trusts for couples in a second marriage to avoid the risk of children being disinherited.
General dispositive provisions: Fiduciaries and their powers
Six types a client may want to designate:
1. guardian of the person of minor children
2. conservator of the estate of minor children
3. testamentary trustee (of any Trusts created by the Will/Trust)
4. executor or successor trustee (or both)
5. a guardian of the person of the client
6. a conservator of the estate of the client
There should be a detailed recitation of the fiduciary’s powers in the Will or Trust, even if they duplicate the State statute since the client may live in a different State at the time of death that has more restrictive powers.
Trust Protector
A Trust Protector provision designates a person, or even a committee, apart from the acting Trustee named in the Trust who can intervene if needed.
HIPAA Waivers
Have become commonplace in Powers of Attorney, precatory letters, nominations of conservator/guardian, Living Wills, and RLTs. Must be inclusive enough to encompass both Federal and State HIPAA laws so important parties will have sufficient access to personal medical records in order to do their designated jobs.
Renunciation or Disclaimer
Under the laws of most states, the widower may renounce or “claim against” the client’s Will or Trust and elect to take their statutorily guaranteed interest in the client’s estate.
Any beneficiary may choose to “disclaim” their interest under the Will or Trust provided they do so in a timely manner, and they are treated as though they predeceased the client.
QDOT
If a spouse is not a US citizen, Qualified Domestic Relations Trust (QDOT) provisions must be incorporated into the Will or Trust to salvage the unlimited marital deduction.
Assets in excess of the Federal estate tax exemption are transferred to the QDOT, which owns the assets and not the non-citizen spouse. Spouse can receive income from the Trust and, with the Trustee’s approval, principal.
Income to spouse is taxed as ordinary income in the year it is received, and when they die, the assets left will be taxed as if they were part of the estate of the decedent citizen spouse.
GST Tax Planning
In its usual form, a GST tax testamentary plan utilizes an ILIT and a second to die life insurance policy to take care of the first generation of beneficiaries, and a C Trust and Successor Dynasty Trusts to set aside a GST tax exempt amount for the benefit of succeeding generations of beneficiaries.
Sub-Chapter S corporate stock ownership
A RLT may hold S corp stock for as long as two years following the Trustor’s death without disqualifying the S corp from favorable tax treatment.
However, if the S corp stock is transferred to a testamentary Trust, that Trust can only hold the stock for 60 days if it is not a qualified Sub-Chapter S Trust.
A Martial Deduction Trust (A Trust) that gives a spouse a general Power of Appointment can be a qualified Sub-Chapter S Trust as can a QTIP Trust.
The right to use B Trust funds to purchase life insurance
If a client establishes a B Trust funded with cash at death, the surviving spouse, who usually acts as the sole trustee, cannot use those assets to purchase life insurance in their life, no matter how much sense that may make.
A special clause may be written permitting the surviving spouse to resign as trustee and the successor trustee can step in and purchase life insurance in the spouse’s life.
Pets as beneficiaries
In at least 10 states, a client can name a pet as a beneficiary of a Trust or Will.
