CHAPTER 44 WILLS, ESTATES, AND TRUSTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 TRANSFER OF AN ESTATE Everyone has an estate, no matter how small. Everyone has an estate, no matter how small. States govern the transfer of estates under probate codes. States govern the transfer of estates under probate codes. Probate Codes vary greatly from state to state. Probate Codes vary greatly from state to state.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 WILLSWILLS Specifies who should inherit property, names guardian for minor children, and/or appoints a personal representative for the estate. Specifies who should inherit property, names guardian for minor children, and/or appoints a personal representative for the estate. To make changes not necessary to write a new will. To make changes not necessary to write a new will. Testator simply makes the changes in a codicil. Testator simply makes the changes in a codicil.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 WILLS Formal Wills: Formal Wills: – Drafted by attorney. – Signed by testator and witnessed by at least two people. Holographic Wills: Holographic Wills: – Written, signed, and usually dated in the testator’s own handwriting.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 WILLSWILLS Nuncupative Wills are oral. Nuncupative Wills are oral. – Usually used only to dispose of personal property. – Must be heard by two or three disinterested witnesses. – Generally to be valid: Made by civilian who anticipates death from an injury received that day. Made by civilian who anticipates death from an injury received that day. Made by soldier or sailor who is in peril or in fear of death. Made by soldier or sailor who is in peril or in fear of death.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 WILLS Matching Wills: Matching Wills: – Appropriate when testators have identical testamentary objectives. – Mutual wills: separate wills in which testators have matching provisions in their respective provisions. – Joint wills: two people sign the same document as their last will. – Contractual wills: people enter into valid contract in which one or more promise to make certain dispositions in their wills.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 REQUIREMENTS FOR A VALID WILL Vary from state to state. Vary from state to state. Person must be an adult the time the will is executed. Person must be an adult the time the will is executed. Testator must have testamentary capacity. Testator must have testamentary capacity. Requires person: Requires person: – Understands the nature and extent of his or her assets. – Knows who his or her close relatives. – Understand the purpose of a will.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 TESTAMENTARY DISPOSITIONS AND RESTRICTIONS Person’s ability to make testamentary dispositions has limits. Person’s ability to make testamentary dispositions has limits. Common restrictions: Common restrictions: – There are limits on giving to charity called mortmain. – Trust established too long a period of time. – Do not allow testator to will money to pets. – Will provisions against public policy.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 TESTAMENTARY DISPOSITIONS AND RESTRICTIONS If testator suspects someone will want to contest will, a no-contest clause may be inserted in it. If testator suspects someone will want to contest will, a no-contest clause may be inserted in it. Generally, a will may exclude family members. Generally, a will may exclude family members. Actual heirs may receive their shares under different theories or philosophies. Actual heirs may receive their shares under different theories or philosophies. Will can be ignored if it was signed under fraud, duress, or undue influence. Will can be ignored if it was signed under fraud, duress, or undue influence.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 INTESTATE SUCCESSION People often fail to sign or execute a valid will. People often fail to sign or execute a valid will. States provide for the transfer of assets of these people. States provide for the transfer of assets of these people. For people whose will does not completely dispose of their property. For people whose will does not completely dispose of their property. Varies from state to state. Varies from state to state.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 PROBATE AND ESTATE ADMINISTRATION Probate determines the validity of a will. Probate determines the validity of a will. Probate ensures estates are properly administered. Probate ensures estates are properly administered. Representative must notify creditors, pay debts, pay an estate taxes, and distribute the remaining assets according to the will. Representative must notify creditors, pay debts, pay an estate taxes, and distribute the remaining assets according to the will. Personal representatives administer the estate and owe fiduciary duties to the beneficiaries. Personal representatives administer the estate and owe fiduciary duties to the beneficiaries.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 AVOIDING PROBATE Property not subject to probate: Property not subject to probate: – Entireties property. – Joint tenancy with rights of survivorship. – Life insurance paid to named beneficiary. Ownership not subject to probate: Ownership not subject to probate: – Pay-on-death ownership.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 AVOIDING PROBATE Advantages: Advantages: – May reduce time and costs. – Provides privacy. Disadvantages: Disadvantages: – The estate will still pay taxes. – More paperwork. – Higher inheritance or estate tax liability. – Creditors will not be discharged for failing to file a claim against the estate. – Unprotected beneficiaries and creditors by law.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 TRANSFER TAXES Federal Transfer Taxes: Federal Transfer Taxes: – Gift tax. – Estate tax. – Generation-skipping transfer tax. State Transfer Taxes: State Transfer Taxes: – Gift tax. – Estate or inheritance taxes.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 RETIREMENT PLANS Pension plans have both income tax and transfer tax consequences. Pension plans have both income tax and transfer tax consequences. Employer plans are: Employer plans are: – Defined-benefit plan occurs when an employer promises to pay the retiree a set benefit based on percentage of employee’s average earnings and number of years worked under the plan. – Defined-contribution plan occurs when an employer promises to contribute a certain amount to the plan each year.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 DURABLE POWERS OF ATTORNEY AND LIVING WILLS Durable powers of attorney used to make financial or medical decisions. Durable powers of attorney used to make financial or medical decisions. Maker concerned that he/she may become unavailable, incapacitated, or incompetent. Maker concerned that he/she may become unavailable, incapacitated, or incompetent. Durable power of attorney appoints a person to make decisions for the maker. Durable power of attorney appoints a person to make decisions for the maker. Living will does not dispose of assets at owners death. Living will does not dispose of assets at owners death.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 DURABLE POWERS OF ATTORNEY AND LIVING WILLS Living will explains how maker feels about the administration of certain medical treatments. Living will explains how maker feels about the administration of certain medical treatments.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 TRUSTS DEFINED Fiduciary relationship where specific property is transferred to the care of a trustee. Fiduciary relationship where specific property is transferred to the care of a trustee. Trusts may be voluntary arrangements created by the property owner. Trusts may be voluntary arrangements created by the property owner. Trust may be legal arrangements imposed by the courts or implied by law. Trust may be legal arrangements imposed by the courts or implied by law.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 EXPRESS TRUSTS Voluntarily created by property owner. Voluntarily created by property owner. Have a creator, a trustee, and one or more beneficiaries. Have a creator, a trustee, and one or more beneficiaries. To be valid: To be valid: – Intention or purpose of creator must be expressed. – Inferred from actions by creator.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 EXPRESS TRUSTS Purpose creators establish trusts: Purpose creators establish trusts: – Provide for more than one beneficiary. – Protect beneficiaries from themselves. – Legally reduce taxes. Under Statute of Frauds most trust deeds must be in writing. Under Statute of Frauds most trust deeds must be in writing.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 EXPRESS TRUSTS Trust terminates: Trust terminates: – When purpose is completed. – Term is over. – By mutual agreement. – It becomes uneconomical. Revocable trust can be revoked by creator. Revocable trust can be revoked by creator. Irrevocable trust may not be terminated during the specified term of the trust. Irrevocable trust may not be terminated during the specified term of the trust.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 EXPRESS TRUSTS Private Trusts. Private Trusts. – Created for an individual and is limited by the time period specified in the rule against perpetuities. Charitable Trusts. Charitable Trusts. – Trusts where money is given to a charity for a public purpose and is tax free.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 EXPRESS TRUSTS Additional Types of Express Trusts Additional Types of Express Trusts – Accumulation trust: reinvests income. – Sprinkling trust: trustee determines which beneficiary receives income and how much. – Spendthrift trust: protects beneficiary from imprudent spending habits. – Discretionary trust: trustee has discretion to pay or not pay beneficiaries.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 ADVANTAGES OF TRUSTS Flexibility. Flexibility. Funding of trust can occur over a period of time. Funding of trust can occur over a period of time.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 DISADVANTAGES OF TRUSTS If trust is irrevocable, creator cannot withdraw money for emergencies. If trust is irrevocable, creator cannot withdraw money for emergencies. Fees. Fees. May increase the amount of taxes paid. May increase the amount of taxes paid.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26 SELECTION OF TRUSTEES AND EXECUTORS Trustees and executors have broad powers and discretion, important to select them wisely. Trustees and executors have broad powers and discretion, important to select them wisely. If decedent does not have valid will naming executor, the probate court will appoint an administrator. If decedent does not have valid will naming executor, the probate court will appoint an administrator. Administrators, executors, and trustees referred as fiduciaries. Administrators, executors, and trustees referred as fiduciaries.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 27 SELECTION OF TRUSTEES AND EXECUTORS Corporate fiduciaries: Corporate fiduciaries: – Do not die. – Generally have the expertise needed to do a competent job. – Does not need to be bonded for faithful performance of its duties. – Last forever. – Charge fees.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 28 SELECTION OF TRUSTEES AND EXECUTORS Individual fiduciaries: Individual fiduciaries: – Do not last forever. – May serve without fees. – Have more knowledge about the business. – Personally concerned for the well-being of the beneficiary. – Biased toward certain beneficiaries.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 29 DUTIES OF TRUSTEES AND EXECUTORS Trustee’s duties: Trustee’s duties: – Is suppose to protect and preserve the trust corpus. – Make the assets productive. – Obligation to follow the terms of the trust. – Duty of care. Trustees must act with the care, skill, and prudence of a businessperson managing his or her own property. Trustees must act with the care, skill, and prudence of a businessperson managing his or her own property.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 30 DUTIES OF TRUSTEES AND EXECUTORS Trustee’s duties: Trustee’s duties: – Duty of loyalty. Not to take advantage of situations involving conflicts of interest. Not to take advantage of situations involving conflicts of interest. To be as impartial as possible among beneficiaries. To be as impartial as possible among beneficiaries. – Duty to diversify the types of investments. – Duty to account. – Trustee must not mix personal funds with trust funds.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 31 DUTIES OF TRUSTEES AND EXECUTORS Trustee’s duties: Trustee’s duties: – Trustee must not borrow money or mortgage trust property. – Trustee will have incidental authority to carry out ordinary duties. Executor’s duties parallel those of a trustee. Executor’s duties parallel those of a trustee. Both have fiduciary duties to beneficiaries. Both have fiduciary duties to beneficiaries.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 32 DUTIES OF TRUSTEES AND EXECUTORS Executor responsible: Executor responsible: – For filing estate and inheritance tax returns. – Paying the applicable taxes. – Filing accounts with probate court.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 33 IMPLIED TRUSTS Implied trusts created by operation of law or imposed by courts. Implied trusts created by operation of law or imposed by courts. Resulting Trusts Resulting Trusts – Owner of property disposes of property but the disposition is not complete. – Person purchases real property with his/her own money and puts title in name of another, without intending to make a gift. – Resulting trust occurs only if the owner is acting in good faith.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 34 IMPLIED TRUSTS Constructive Trusts: Constructive Trusts: – An equitable remedy. – Arises by operation of law to redress a wrong or to prevent unjust enrichment. – Created to correct unfair results.