Introduction to Wills & Trusts

So who gets your property when you die? Generally speaking, there is no right to inherit. Its only an expectancy. There is only a right to transmit your property.

“Dead Hand” Control
A decedent may condition a beneficiary’s gift on the beneficiary behaving in a certain manner as long as the condition does not violate public policy. Things that violate public policy include a complete restraint on marriage, requiring a beneficiary to practice a certain religion, encouraging divorce or family strife, or directing the destruction of property. You can require that a condition be marriage to a certain race or religion because that's only a partial restraint on marriage. One exception to the rule against the complete restraint on marriage is that a decedent can restrain a second marriage. For example, a wife can tell her husband she leaves him everything unless he remarries. That would be a valid condition. If there is violation of public policy, the provision (not the whole will) is struck down.

So who takes the decedent’s property? It depends on whether you have to go through probate. Non-probate property include: joint tenancies, life insurance, POD, legal life estates and remainders, and inter-vivos trusts among others. If you die with a will (tested) or without a will (intested) then your property will go through probate and the probate court will decide who gets what.

The Probate Process
First, some terminology. Someone who doesn’t have a valid will when they die is said to have died "intestate." When you die intestate, real property will "descend" to your "heirs." When you die intestate, personal property will be "distributed" to your "next of kin."

On the other hand, someone who does have a valid will when they die has died "testate." A male who had a valid will when they died is a "testator" and a female who had a valid will when she died is referred to a "testatrix." When you die testate, real property will be "devised" to "devisees." And when you die testate, personal property will be "bequathed" to legatees.

Exemptions from probate:
If the probate estate is less than $10,000 OR if the property is going to a surviving spouse.

What are the general steps when going through probate?

First, interested person will petition the probate court to have a will approved ("probate the will"). The court then notifies all possible heirs. Probate is conducted where the person is domiciled (where the person resides). This is not always where the will was written, but could be. There are certain exceptions. For example, if a person bought real property in Los Angeles, then that real property is probated in Los Angeles. If the testator has property outside the state, then you must open up ancillary probate in the jurisdiction where the testator has real property.

The interested person must bring the will contest within 4 months. But to contest a will, a person must have standing (a pecuniary interest in the outcome of the case) by showing that s/he will have more money if the will were struck down than if the will stands. If no one contests the wills, then the will is admitted to probate. If someone contests the will, then you go to court proceedings.

Next, the court appoints an executor (someone who carries out the will). The executor can be named or appointed. If there is no will, then the person is called an "administrator." The executor posts bond to make sure s/he won’t steal assets, but if you appoint a family member as executor then the bond requirement is usually waived.

Then the Judge issues a “certificate of authority” (letters testamentary) to executor so that when the executor deals with the bank, s/he can show authority to administer the estate assets.

The executor must then give notice to possible creditors. Generally, creditors have 2-4 months to bring a claim. Proper creditor claims must be paid off. If notice is properly given and the creditors do not bring a claim on time, then they are barred. Once the 2-4 months have passed and there are no more creditor claims, executor distributes according to the will.

Paying off creditors
In the U.S., heirs, unlike in Europe, are not liable for debts of the person who died. However the deedent’s estate remains liable. How can creditors bring claims against the estate? They must do so on time. There are 2 types of statute of limitations that begins to run against creditors. First, there are SHORT-TERM (2-3 months) SOLs which are referred to as "non-self executing" SOLs. The state action of opening up the probate process triggers the non-self executing SOL. Due process requires that in order to use a short-term SOL, you must give actual notice to known or reasonably ascertainable creditors. California requires actual notice. Second, there arae LONG-TERM (1-2 years) SOLs which are referred to as "self-executing" SOLs" This is triggered by death. Every jurisdiction has one. These are typically longer. Creditors claims are cut off after 1-2 years. No state action is required because it begins at death. There is no due process issue.

What's unique about the U.S. is that there is no concept of "universal succession" as there is in Europe or other parts of the world. In most parts of the world, if the heirs inheirt both the assets and all debts. Thus if debts exceed assets of the estate, heirs are personally liable for debt. But this is not so in the U.S.. Only the estate is liable for debts. The heirs are not personally liable for debts of the estate.

Estate planning tips
In advising a client about his or her estate plan, key objectives that the attorney should keep in mind are (1) honoring the client’s intent, (2) avoiding estate taxes, and (3) avoiding probate.

The Dreaded "Estate Tax"
The estate tax is based on your taxable estate. So what is included in your taxable estate? Joint tenancies, revocable living trusts, and the like are part of your estate tax liability because you have control over them while you are alive. There are a couple ways to avoid the estate tax. First, you can give assets away while you are living. The IRS allows about 10-12K per year you can give your kids without facing estate tax liability.

Second, there area certain "bypass trusts" that can be created. If you die this year, in 2009, the estate tax exemption is $3.5M. So if your taxable estate is less than $3.5M, then there is no estate tax. But if your taxable estate is $4M, then $500,000 would be subject to the estate tax.

If you die in 2010, there is no estate tax at all.

In 2011, the estate tax exemption drops to $600,000. So if your estate is more than $600,000 you will have to pay estate tax.

To illustrate how a bypass trust would work consider the following example. If husband (H) owned $3.5M and wife (W) owned $3.5M, and H died giving his $3.5 to W, the W now has $7M. If she passes this to her son, then there is an estate tax that will be impsoed on $3.5M. ($7M less the $3.5M exemption). To avoid this, H can, instead of giving the $3.5M to wife, place the $3.5M in a trust, giving the income to wife for life. This way, when W died, she passes her own $3.5M to son and son doesn’t have to pay estate tax.