02 Aug Estate Planning Q&A Series: Introduction to Estate Planning
It is possible throughout this Estate Planning Q&A Series that one or more of the following questions and answers will help you understand a deceptively complicated area of the law, i.e., Estate Planning. Why should you try to understand the dense, boring, and complicated information in this portion of our firm’s website? For any of this information to be relevant to you and your property, you have to die. At that point you will be beyond caring about anything, so it will not matter to you what happens to your property. On the other hand, maybe you are interested in this topic because you want to know what might happen to someone else’s property—a spouse or relative, perhaps—when they die. If that is the case, then you need to encourage them to read what follows and this Q&A series, because only they have the right to plan their estates, and you are just an interested bystander. On the third hand, maybe you are concerned about what might happen to your property when you die, and in that case, the law allows you many, many options to plan your estate so that when you die, the beneficiaries of your estate will receive what you want them to receive.
The reason most people plan their estates is because they don’t want their family and friends to have to suffer as the result of a lack of planning for an unfortunate event that inevitably will occur. With that in mind, we hope you will take the time to review these questions and answers, but as you do, please know that this information can’t and isn’t intended to take the place of your personalized conference with an attorney in our firm. As you review these questions and answers, you will begin to realize that it is, in fact, complicated, and that you will need help in planning your estate. That is why our firm exists—to help people like you with your legal problems and opportunities.
What is Estate Planning?
“Estate Planning” is a term loosely applied to getting one’s affairs in order so that death will not cause undue hardship to a decedent’s survivors. However, on occasion it is used as a description of doing specific planning with a view towards legally avoiding as much Federal Estate Tax as possible. An estate plan might consist of a simple will, or it might be an extremely complicated plan involving corporations, trusts, inter vivos transfers of property, etc. There is no definitive estate plan for you. Rather, you will be faced with a series of choices, each having its advantages and disadvantages. An attorney in our firm may make certain recommendations, but you must understand that the final choice as to your estate plan will have to be yours, and therefore it is important for you to understand as clearly as possible the principles involved.
What if I do not do any Estate Planning?
If you do not do any estate planning, the law makes a plan for you. Rarely is the plan the law devises one that you would make for yourself, but that is the “default setting.” Missouri has “intestate descent laws” which govern how a probate estate for someone who has died “intestate” (without a Will) must be administered. We can explain for you how these laws would apply to your situation if you would like to schedule an appointment with us. However, it would be very, very unusual for us to recommend that an estate plan for a client consist of that which Missouri (or any other state) prescribes in the event of intestacy. Nevertheless, sometimes people die without doing any estate planning. If they do not own anything at that point in time, then no harm and no foul. But if they own property, getting that property to the people the law prescribes occurs only after a lengthy and needlessly expensive probate proceeding. Lawyers tend to be unintended beneficiaries of unplanned estates, because it sometimes takes lots of them to untangle the problems that easily could have been resolved had the decedent planned his or her estate. For example: a husband who dies with no estate plan survived by his wife and children might force his wife to share his property with the children such that they get their shares in guardianship or conservatorship accounts until they are 18 years old, and then get their shares free and unfettered from any restriction when they turn 18. Sometimes (but rarely) children are able to handle the ownership of substantial assets when they turn 18. Most of the time it turns out badly, however. We can give you lots of examples of how taxes, expenses, and delays all can be avoided through a well-planned estate if you are interested.
What are the methods of Transferring Property at Death?
- Jointly Owned Property: A substantial majority of the property which passes on death in the United States does so by “right of survivorship.” Perhaps you have seen the initials “JTWROS” on a stock certificate or a bank account. These initials stand for “joint tenants with right of survivorship.” The legal implication of this type of ownership is that on the death of one of the joint tenants or joint owners of the asset, the surviving joint tenant or joint owner owns the entire asset. The deceased joint owner’s interest is considered as being transferred as of the moment of death to the surviving joint tenant or joint tenants. Perhaps you also have seen the expression “tenants by the entireties.” This is another form of joint ownership involving a right of survivorship, except that it exists only between a husband and wife. The principal difference between property owned as tenants by the entireties versus property owned as joint tenants with the right of survivorship is that property owned by a husband and wife as tenants by the entireties may not be sold without the consent of both spouses. Property which you own with another person as a joint tenant with the right of survivorship may be conveyed (at least in part) by the act of only one of the joint tenants. The effect of an attempted conveyance by one joint tenant of his or her interest in an asset owned as joint tenants with the right of survivorship is to convert the joint tenancy into what is known as a “tenancy in common.” In this circumstance, the conveyance of the joint tenant’s interest would be a conveyance of his or her undivided interest in the whole property, leaving the remaining joint tenant and the new owner of the former joint tenant’s interest in the property as owner’s of the assets in the form of ownership known as “tenancy in common.” A joint tenant with right of survivorship may convey his or her undivided interest in the property without the consent of the other joint tenant. However, if a husband and wife own property as tenants by the entireties, then neither the husband nor the wife may convey his or her interest in that property without the consent of the other spouse. A tenancy in common involves no rights of survivorship; instead, any interest a decedent owns as a tenant in common is treated as the decedent’s separate property. For example, if Mr. D and Mr. S each own an undivided one-half interest as a tenant in common in real estate having a total value of $100,000.00 on the date of Mr. D’s death, Mr. D’s estate will include his 50% interest in this real estate with a corresponding value of $50,000.00.
- Wills: The next most frequently encountered method for transferring property is by a Will. A Will is a document which must be executed with the formality required by the law of the jurisdiction in which the Will is made. Perhaps you have seen the expression “Last Will and Testament.” The latest or final valid Will which an individual writes before his or her death becomes that person’s “Last Will and Testament.” The word “testament” refers to a gift or gifts made after death and pursuant to a Will, and gives rise to the adjective “testamentary” which is another way of saying that it is a provision made by a Will. The word “testamentary” is usually used in opposition to the words “Inter Vivos.” The words “Inter Vivos” mean “during life.” Thus an Inter-Vivos disposition is one made by an individual during his or her lifetime and before death. One also encounters the terms “testamentary” and “Inter Vivos” with respect to trusts. Thus a “testamentary” trust would be one created by a Will whereas an “Inter Vivos” trust would be one created by an individual during his or her lifetime.
- Life Insurance: Another frequently encountered method of transferring wealth at death is by means of life insurance. A life insurance policy is a contract between an individual or individuals and an insurance company. The contract requires the insurance company to pay a certain sum of money to a designated beneficiary or beneficiaries upon the death of the insured. However, the insurance policy itself may be a valuable asset, particularly if it has a substantial cash value. There are usually three categories of persons involved in an insurance policy other than the life insurance company, to-wit:
- 1. The owner of the policy;
- 2. The insured (the person whose death gives rise to the insurance company’s obligations to pay proceeds upon the death of the insured); and
- 3. The beneficiaries of the policy.
Typically, the owner and the insured are the same person. Also typically, the owner designates a series of alternate or contingent beneficiaries, that is, a series of potential recipients of the death benefit proceeds. However, the owner and the insured need not be the same person, and the beneficiaries of a life insurance policy need not be natural persons. Instead, the beneficiaries of a life insurance policy can be the trustee of a trust, an estate, a corporation, or another entity.
- Inter Vivos Trust: A less frequently encountered but useful estate planning tool is an inter vivos trust. If an individual is a trustee of a trust, he or she is in approximately the same legal relationship to the assets owned by that trust as the officer of a corporation is in with respect to the assets of the corporation. If the President of General Motors dies tomorrow, can there be any doubt that General Motors as a separate legal entity would continue doing business without significant interruption? This is because General Motors is a corporation, a separate legal entity whose existence does not depend upon the life span of a particular individual. A trust is a similar legal “fiction”, that is, it is a device authorized by the American legal system to permit an activity to continue regardless of the death or incapacities of the various individuals who may be interested in the trust at any particular time. Thus, if an individual is a trustee of a trust, and then dies, a substitute trustee takes over and the trust continues uninterrupted. Trusts are explained in greater detail below, but the ability of a trust to transfer ownership of property at death is important.
- Gifts Taking Effect at Death: Sometimes property is given to an individual with the understanding that possession or enjoyment will not commence until the death of the giver. The law uses the term “donor” to describe one who makes a gratuitous gift of property. The term “donee” applies to the recipient of the gift. Thus, for example, the donor might transfer real estate to the donee, but reserve a “life estate” in the donor. This reservation of a life estate means that the donor is allowed to use the property for the rest of his or her life, without interference from the donee. Upon the donor’s death, the life estate terminates, and the donee now owns the property free and clear of any restrictions. Another form of this type of gift is a gift of real estate which does not become effective until the death of the donor. Special conveyances by deeds which are not effective until the death of the donor and which may be revoked by the donor at any time until the donor’s death are possible under the laws of the state of Missouri.
- Gifts with “Strings Attached”: There are various kinds of gifts which may be made during one’s lifetime, but most are not the type of transfer which takes effect, for all practical purposes, only upon the death of the donor. Rather, the typical gift made during a donor’s lifetime passes title as of the moment of the gift, and the donor retains no further interest in the gifted property. A gift with “strings attached” on the other hand, may not be a completed gift for legal or tax purposes. Thus the donor may think that he has parted with the ownership of the gifted property, but if he has retained control or “strings” over the gift, the gift may not accomplish the donor’s intended objectives. For example, if Mr. D gives certain real estate to his son upon the condition that the son will re-convey the property back to Mr. D upon Mr. D’s request, the “gift” would not remove the value of the property from Mr. D’s estate for federal estate tax purposes. However, the gift might be effective to pass legal title to the property so that the real estate would not be a part of Mr. D’s probate estate upon Mr. D’s death. Thus real property legal principles and tax principles are different and sometimes completely inconsistent.
What is a Will?
Wills are written documents used to transfer property at death to the beneficiaries named in the Will. A Will is a written set of instructions as to how the author of the will (the “Testator” or “Testatrix”) intends for his or her property to pass at death. Furthermore:
- A Will must be in writing, and it must be witnessed and executed with the formality required by law. We will make certain that this takes place with respect to any Will executed by you in our law office. A Will has no legal significance, however, until you die. Assuming a Will was written and executed in the proper fashion, it will be effective to pass title to the property owned by the author of the Will (referred to as the “Testator” if the author is male; or “Testatrix” if the author is female) at the time of his or her death
- A person only has one Last Will and Testament in existence as of any given moment in time. Any copies of a Will are not admissible in probate or valid as a general rule. Rather, only the original of the last document executed by the Testator or Testatrix with the intention that it constitute that person’s Last Will and Testament will have the desired effect. If the original Will cannot be found, the presumption the law follows is that the maker of the Will deliberately destroyed it.
- A Will may be amended or revoked at any time prior to death. No person acquires any rights to your property just because you name him or her as a beneficiary in a prior version of your Will. You may change that Will at any time prior to your death. The last valid Will written by you prior to your death becomes your “Last Will and Testament” and becomes the one which governs the disposition of those terms of your property subject to it.
- An amendment to a Will is called a “codicil.” A Will may be amended at any time before your death or wholly revoked and replaced with a new version. The concept of revoking a Will is an important one. It is fairly easy to revoke a Will in that virtually any overt act which indicates your intention to revoke your Will can be construed as a revocation. Thus if you decide that you do not like one particular clause in your Will, and draw a line through it, you will have revoked at least that provision if not the entire Will. You may not, however, make a codicil or amendment to your Will except by following the same procedure you did in executing your Will in the first place. The same type of ceremony is involved. You should not make any marks on your Will unless you intend to revoke the entire document. You may not amend a particular clause, by, for example, by lining through the name of one beneficiary and writing in above that name the name of the replacement beneficiary. You should always check with a lawyer before taking such a step. You may inadvertently revoke your entire Will and adversely affect your estate plan by making any hand-written changes to your Will.
- A Will, to be valid and effective, must be “admitted to probate.” (More information to come on that in a later piece.)
What is a Trust?
A trust is a custody device. In owning any piece of property, the law creates two separate types of title: “legal” and “equitable.” The concept of legal title involves the registration or formal ownership of property. The concept of equitable title involves the person who is entitled to the benefits of the ownership of that property. In most cases, legal and equitable title are vested in the same person. For example, an automobile may have a legal title which is issued by the State of Missouri. If the person named on the legal title is also the equitable owner as well, then that person may operate the automobile for such purposes as he or she sees fit. If the legal owner of the automobile is a trust, however the legal owner may not necessarily be able to operate the automobile without restrictions.
- A trust involves the separation of the legal and equitable titles with respect to the property held by that trust. Legal title is held by a person designated as the “trustee”, but the trustee holds the property for the benefit of the beneficiaries of the trust, i.e., the person or persons for whose benefit the trust was created. Equitable title to the trust assets is considered as being vested in these beneficiaries, and the trustee manages the assets held in trust for the benefit of these beneficiaries. Usually the trustee may not use the assets in the trust for the trustee’s benefit. The legal title to these trust assets is vested in the trustee, but not the equitable title.
- A trust may be created by a variety of devices, but the most frequent method is the creation of a written document known as a “trust agreement” which is created by the person desiring to do so, who is known as the “grantor.” The grantor executes a trust agreement, and delivers to the trustee named in the trust agreement certain assets to be held by that trustee, in trust, for the uses and purposes delineated in the trust agreement. The creation of the typical inter vivos trust involves giving the trustee extensive instructions as to his or her duties, and as to the application of funds and assets coming into the trustee’s possession. The trustee also is instructed as to when the trust is to terminate. On the day of termination, the trustee must convey legal title to the trust assets either back to the name of the grantor (if the trust is revocable) or to other beneficiaries named in the trust agreement. The trustee also has to take the other steps necessary to wind up and terminate the trust. If a trust has not been revoked as of the date of the death of the grantor, the trust continues as prescribed by the trust agreement for the benefit of the named beneficiaries. The successor trustee assumes the duties which were being performed by the trustee if the first trustee was the grantor. Such an arrangement permits the assets in the trust to avoid a probate administration and to be delivered into the hands of the intended beneficiaries shortly after the grantor’s death. Of course, the trust also can establish a federal estate tax savings scheme.
- Upon its creation, a trust becomes a separate legal entity, but a revocable trust does not become a separate taxpayer for income tax purposes because all income is taxed to the grantor during his or her lifetime. However, upon the death of the grantor, any income generated thereafter is taxed to the income beneficiary or beneficiaries of the trust, or to the trust itself, depending upon the provisions of the trust agreement.
Estate planning is a complicated area of law and there are a number of mechanisms by which an individual can transfer property at death. If you are interested in reading more about estate planning, please stay tuned for coming articles in our Estate Planning Q&A Series:
- What is Probate, What Occurs During a Probate Administration, and How may Probate be Avoided
- Providing Others with the Power to Make Medical and Legal Decisions
Whether you are ready to begin planning your estate, you want to amend an existing estate plan, or you may administer a decedent’s estate, the attorneys at our firm would be honored to assist you.
This article seeks to provide a summary of some common questions about estate planning in Missouri and does not address all aspects, elements, restrictions, or requirements. This article is not offered, nor should it be construed, as legal advice. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice. You should consult an attorney if you have any questions about your legal matter. Choosing a lawyer is an extremely important decision and should not be based solely upon advertisements.
© Van Matre, Harrison, Hollis, Taylor & Elliott, P.C.