14.5 Summary and Exercises

Summary

Estate planning is the process by which an owner decides how her property is to be passed on to others. The four basic estate planning tools are wills, trusts, gifts, and joint ownership. In this chapter, we examined wills and trusts. A will is the declaration of a person’s wishes about the disposition of her assets on her death. The law of each state sets forth certain formalities, such as the number of witnesses, to which written wills must adhere. Wills are managed through the probate process, which varies from state to state, although many states have now adopted the Uniform Probate Code. In general, anyone over eighteen and of sound mind may make a will. It must be signed by the testator, and two or three others must witness the signature. A will may always be modified or revoked during the testator’s lifetime, either expressly through a codicil or through certain actions, such as a subsequent marriage and the birth of children, not contemplated by the will. Wills must be carefully drafted to avoid abatement and ademption. The law provides for distribution in the case of intestacy. The rules vary from state to state and depend on whether the decedent was married when she died, had children or parents who survived her, or had collateral heirs.

Once a will is admitted to probate, the personal representative must assemble and inventory all assets, have them appraised, handle claims against the estate, pay taxes, prepare a final accounting, and only then distribute the assets according to the will.

A trust is a relationship in which one person holds legal title to certain property and another person has the use and benefit of it. The settlor or grantor creates the trust, giving specific property (the res) to the trustee for the benefit of the beneficiary. Trusts may be living or testamentary, revocable or irrevocable. Express trusts come in many forms, including Totten trusts, blind trusts, Clifford trusts, charitable trusts, and spendthrift trusts. Trusts may also be imposed by law; constructive and resulting trusts are designed to redress frauds, prevent unjust enrichment, or see to it that the intent of the parties is carried out.

Exercises

  1. Seymour deposits $50,000 in a bank account, ownership of which is specified as “Seymour, in trust for Fifi.” What type of trust is this? Who is the settlor? The beneficiary? The trustee? May Seymour spend the money on himself? When Seymour dies, does the property pass under the laws of intestacy, assuming he has no will?
  2. Seymour, a resident of Rhode Island, signed a will in which he left all his property to his close friend, Fifi. Seymour and Fifi then moved to Alabama, where Seymour eventually died. Seymour’s wife Hildegarde, who stayed behind in Rhode Island and who was not named in the will, claimed that the will was revoked when Seymour moved from one state to another. Is she correct? Why?
  3. Assume in Exercise 2 that Seymour’s Rhode Island will is valid in Alabama. Is Hildegarde entitled to a part of Seymour’s estate? Explain.
  4. Assume in Exercise 2 that Seymour’s Rhode Island will is valid in Alabama. Seymour and Hildegarde own, as tenants by the entirety, a cottage on the ocean. In the will, Seymour specifically states that the cottage goes to Fifi on his death. Does Fifi or Hildegarde get the cottage? Or do they share it? Explain?
  5. Assume in Exercise 2 that Seymour’s Rhode Island will is not valid. Seymour’s only relative besides Hildegarde is his nephew, Chauncey, whom Seymour detests. Who is entitled to Seymour’s property when he dies—Fifi, Hildegarde, or Chauncey? Explain.
  6. Scrooge is in a high tax bracket. He has set aside in a savings account $100,000, which he eventually wants to use to pay the college expenses of his tiny son, Tim, who is three. The account earns $10,000 a year, of which $5,000 goes to the government in taxes. How could Scrooge lower the tax payments while retaining control of the $100,000?
  7. Assume in Exercise 6 that Scrooge considers placing the $100,000 in trust for Tim. But he is worried that when Tim comes of age, he might sell his interest in the trust. Could the trust be structured to avoid this possibility? Explain.
  8. Assume that Scrooge has a substantial estate and no relatives. Is there any reason for him to consider a will or trust? Why? If he dies without a will, what will happen to his property?

Self-Test Questions

  1. A will written by the testator’s hand and not witnessed is called

    1. a conditional will
    2. a nuncupative will
    3. a holographic will
    4. a reciprocal will

  2. A written modification or supplement to a prior will is called

    1. a revocation clause
    2. an abatement
    3. a codicil
    4. none of the above

  3. A trust created by will is called

    1. an inter vivos trust
    2. a reversionary trust
    3. a Totten trust
    4. a testamentary trust

  4. Trustees are not permitted to tell the grantor how they are managing their portfolio of assets in

    1. a Clifford trust
    2. a spendthrift trust
    3. a blind trust
    4. a voting trust

  5. An example of an implied trust is

    1. a spendthrift trust
    2. a Clifford trust
    3. a resulting trust
    4. none of the above

Self-Test Answers

  1. c
  2. c
  3. d
  4. c
  5. c