Smart Will (or how to avoid a legal morass)

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snackdog
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Smart Will (or how to avoid a legal morass)

Post by snackdog » Mon Mar 20, 2017 12:11 pm

I read somewhere recently that any specifications in a will regarding percentages (fractions) of a total estate are dangerous as they may attract legal challenges.

For example, if your will said 10% of your estate would go to a charity, many charities would hire an attorney to follow up and ensure your total estate value was correctly calculated and that they received the full 10% designated in your LW&T. Your executor may have to hire an attorney as well and there is a potential for costly litigation (and estate lawyers, as we all know, tend to litigate happily until the entire estate is exhausted on legal fees). The same could happen if you designate a percentage to person (such as a child or other relative).

There are a couple ways to ameliorate this risk. One is to avoid fractions and use dollar amounts. In order to ensure those dollar amounts are available, one would have to be conservative in estimating them and keep the will updated periodically. If you had a $1MM estate, you could perhaps designate $100,000 to a charity and remainder to a child.

Another way is to make the payments while you are alive. Send a check to the charity now and get it over with. This is fine if you are over 80 or so and feel like sending periodic large checks to the charity.

Thoughts?

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Re: Smart Will (or how to avoid a legal morass)

Post by Jack FFR1846 » Mon Mar 20, 2017 12:15 pm

All good tips!

From all of the stories I've heard (some from my friends who have gone through it), don't leave a house or property to more than one person. If that's unavoidable, specify that the house or property must be sold upon your death. It's easy to split up money. Harder to split a house with one sibling who lives 2000 miles away, another who owns $7 in total and a third who just wants to "fix up the house".
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afan
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Re: Smart Will (or how to avoid a legal morass)

Post by afan » Mon Mar 20, 2017 12:34 pm

Hmm. Easier said than done.

Values of an estate can bounce around with the financial markets. And it would be hard to know what it is worth even at the moment if it includes illiquid assets like real estate. By picking a dollar amount you could end up disinheriting someone unintentionally. Say your estate is worth $1M and you plan to leave half to charity and the other half to someone else, charity, or individual. You write your will to say "$500k to charity A and the rest to charity B". The market plummets while you are in a coma and by the time you die, your estate is only worth $500k. Charity A gets it all.

The solution may be worse than the problem. We have percent allocations in our estate plan and our attorney in fact suggested them. I accept that any heir could litigate, but other than leaving all to one person, I don't see a way around it.
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Re: Smart Will (or how to avoid a legal morass)

Post by LarryAllen » Mon Mar 20, 2017 12:40 pm

I think percentages are fine. Most charities are happy to get the money in my experience.

One way to factor in future estate size change is a clause like: "the lesser of $100,000 or 10 percent of the estate xyz charity/person/whatever...."

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Re: Smart Will (or how to avoid a legal morass)

Post by CAsage » Mon Mar 20, 2017 1:10 pm

Estates and wills have a soft, squishy, nebulous relationship. Often the majority of an estate will pass outside the control of a will = by intent. My house and brokerage accounts go by trust, and my IRAs go by beneficiary, my savings/checking/auto go by Transfer on Death (very fast, that one). So.... I have a will, and it pretty much just covers naming an executor to clean up and my personal goods. Or that last minute lottery ticket :P . Suggest you think about where your assets are allocated, and then think about what is really under the control of a will.
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dodecahedron
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Re: Smart Will (or how to avoid a legal morass)

Post by dodecahedron » Mon Mar 20, 2017 1:12 pm

snackdog wrote:
Another way is to make the payments while you are alive. Send a check to the charity now and get it over with. This is fine if you are over 80 or so and feel like sending periodic large checks to the charity.

Thoughts?


Assuming you would be donating from your taxable account, another advantage to immediate charitable giving now vs charitable bequest in your will: you get a deduction against your income tax if you give now, but generally no income tax deduction if you donate via a bequest in your will (unless your estate has taxable income after your death, which is unusual and can't always be predicted).

Of course, there are also various deferred giving arrangements (CRUTs and CRATs) that will secure an income tax deduction now for a deferred gift that you set up irrevocably today.

And simply designating a charity as beneficiary of your tax-deferred retirement plan is also a very easy and tax-efficient way to donate.

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Re: Smart Will (or how to avoid a legal morass)

Post by rob » Mon Mar 20, 2017 1:17 pm

Could this be a good case for a no-contest provision.... If the charity (or any beneficiary really) has something already they might not want to risk losing that on the chance they could get more. I know they are limited by some states and can be nasty but just a thought.
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Re: Smart Will (or how to avoid a legal morass)

Post by dodecahedron » Mon Mar 20, 2017 1:20 pm

snackdog wrote:I read somewhere recently that any specifications in a will regarding percentages (fractions) of a total estate are dangerous as they may attract legal challenges.

For example, if your will said 10% of your estate would go to a charity, many charities would hire an attorney to follow up and ensure your total estate value was correctly calculated and that they received the full 10% designated in your LW&T. Your executor may have to hire an attorney as well and there is a potential for costly litigation (and estate lawyers, as we all know, tend to litigate happily until the entire estate is exhausted on legal fees). The same could happen if you designate a percentage to person (such as a child or other relative).



I think "many charities" vastly overstates the case. Most charities don't have the resources to do this and it would generate massive bad will for the charity (discouraging future donations from others), not to mention that it would rarely be cost effective for the charity to do this unless the estate was very large.

That said, having served on several nonprofit boards, I can tell you that percentage bequests in your will could well take a longer time to arrive after your death (with presumably a lot of billable legal hours piling up and charged to the estate before the percentage was calculated, reducing the amount your intended charity receives) than a simple beneficiary designation on one of your tax-deferred retirement accounts or a CRUT/CRUT arrangement.

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Re: Smart Will (or how to avoid a legal morass)

Post by dodecahedron » Mon Mar 20, 2017 1:25 pm

My own charitable giving at death plans are: designate my Schwab Charitable Donor Advised Fund (DAF) as beneficiary of a dedicated tax-deferred retirement plan. I am writing a letter to my daughters (who are the successor advisors on my DAF) with informal nonbinding advice and guidance about how to donate the resulting funds.

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Re: Smart Will (or how to avoid a legal morass)

Post by johnnyc321 » Mon Mar 20, 2017 1:27 pm

I'm a trusts & estates lawyer and I believe percentages are best and most documents are (for example, "in equal shares to my then living descendants, per stirpes"). I don't like specific gifts for many reasons unless they are small dollar amounts.

Also, in my state (Florida), directing your house to be sold at your death can be cause for malpractice.

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Re: Smart Will (or how to avoid a legal morass)

Post by afan » Mon Mar 20, 2017 4:24 pm

dodecahedron wrote:
Assuming you would be donating from your taxable account, another advantage to immediate charitable giving now vs charitable bequest in your will: you get a deduction against your income tax if you give now, but generally no income tax deduction if you donate via a bequest in your will (unless your estate has taxable income after your death, which is unusual and can't always be predicted).


But you would get a reduction in estate taxes.
Is it really that unusual for an estate to have taxable income? All it would need is a bank account...
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Re: Smart Will (or how to avoid a legal morass)

Post by bsteiner » Mon Mar 20, 2017 4:46 pm

You are correct that a beneficiary of a percentage or fractional share is an interested party as to the administration of the estate.

Whether to leave a beneficiary a percentage or a fraction, or a dollar amount, depends on the relative size of the bequest, and on tax issues.

If you're leaving a charity (or an individual, for that matter) $100,000 out of $10 million, it's easier to leave a $100,000 bequest rather than 1% of the estate. That way, that beneficiary has no interest in the estate other than receiving $100,000.

However, if you're leaving someone $500,000 out of $1 million, and someone else the rest, if you leave one a fixed $500,000 amount and the rest to the other, if the estate grows to $1.5 million, the other will end up with 2/3 of the total. If the estate drops to $500,000 the other will end up with nothing. If that's not what you want, then percentages or fractional shares will work better.

If the two are the marital share (the spouse or a marital trust) and the credit shelter trust, then you may want the marital share to get a dollar amount (so that the post-death growth will be sheltered). Or you may want the credit shelter trust to get a dollar amount (if you expect nondeductible post-death expenses to reduce the size of the estate). And sometimes you may want to use percentages or fractions. The lawyer should be able to determine which of the three is best in a given case.

Charities, at least larger ones, do have lawyers who look at estates to make sure the charity gets what it's supposed to get. In New York, the attorney general will also look at estates where a charity shares in the residuary. However, a charity is no more likely to object to the administration of an estate than an individual. Indeed, a charity is probably less likely to object to the administration of an estate. Someone I know represents a large charity and he said that they tend not to object to minor items since they don't want to bite the hand that feeds them. I'm about to see this from the other side, since I represent a charity that will receive a decedent's residuary estate.

johnnyc321 wrote:I'm a trusts & estates lawyer and I believe percentages are best and most documents are (for example, "in equal shares to my then living descendants, per stirpes"). ...


I think a court would construe this to be per stirpes rather than per capita. But to avoid any doubt, I would say "to my then living descendants, per stirpes" (or something similar), without the words "equal shares".

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Re: Smart Will (or how to avoid a legal morass)

Post by dodecahedron » Mon Mar 20, 2017 10:23 pm

afan wrote:
dodecahedron wrote:
Assuming you would be donating from your taxable account, another advantage to immediate charitable giving now vs charitable bequest in your will: you get a deduction against your income tax if you give now, but generally no income tax deduction if you donate via a bequest in your will (unless your estate has taxable income after your death, which is unusual and can't always be predicted).


But you would get a reduction in estate taxes. 1) Very few people have any exposure to estate taxes. 2) Even for those who do, lifetime charitable giving will reduce BOTH estate and income taxes while charitable giving by bequests generally only reduces estate taxes
Is it really that unusual for an estate to have taxable income? All it would need is a bank account...The first $600 of estate income is not subject to tax so at current interest rates the balance in that bank account would have to be pretty high to generate taxable income


That said, yes there are some estates with taxable income (e.g. from decedents whose businesses had accounts receivable paid off after death) but most of that would often be offset by legal and accounting fees for the estate.

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Re: Smart Will (or how to avoid a legal morass)

Post by TBillT » Tue Mar 21, 2017 11:22 am

johnnyc321 wrote:
Also, in my state (Florida), directing your house to be sold at your death can be cause for malpractice.


Now I am confused if specifying sale of the house upon death is a good idea.
I can see if my mother died that a sibling might want the house and that might be hard to manage.

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Re: Smart Will (or how to avoid a legal morass)

Post by afan » Tue Mar 21, 2017 3:30 pm

bsteiner wrote:If the two are the marital share (the spouse or a marital trust) and the credit shelter trust, then you may want the marital share to get a dollar amount (so that the post-death growth will be sheltered). Or you may want the credit shelter trust to get a dollar amount (if you expect nondeductible post-death expenses to reduce the size of the estate). And sometimes you may want to use percentages or fractions. The lawyer should be able to determine which of the three is best in a given case.


This sounds like something that might be decided around the time of death, depending on resources available, tax laws, etc. Is it possible to draft the documents so that the surviving spouse gets to decide then how much to allocate to each trust?
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Re: Smart Will (or how to avoid a legal morass)

Post by afan » Tue Mar 21, 2017 3:33 pm

dodecahedron wrote:The first $600 of estate income is not subject to tax...


At a 2% dividend rate, $30,000 in a stock fund would generate $600 in income. More if there were bonds. There are a lot of $30k estates.

There may be relatively few people subject to estate tax, but for those who are, estate tax is very important.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Smart Will (or how to avoid a legal morass)

Post by bsteiner » Tue Mar 21, 2017 3:51 pm

afan wrote:
bsteiner wrote:If the two are the marital share (the spouse or a marital trust) and the credit shelter trust, then you may want the marital share to get a dollar amount (so that the post-death growth will be sheltered). Or you may want the credit shelter trust to get a dollar amount (if you expect nondeductible post-death expenses to reduce the size of the estate). And sometimes you may want to use percentages or fractions. The lawyer should be able to determine which of the three is best in a given case.


This sounds like something that might be decided around the time of death, depending on resources available, tax laws, etc. Is it possible to draft the documents so that the surviving spouse gets to decide then how much to allocate to each trust?


If you sign a Will after you die, we won't know about it. In order for your Will to be effective, you have to sign it during your lifetime. If your Will contains a marital/credit shelter formula, you have to select one of these three (pecuniary marital/residuary credit shelter, pecuniary credit shelter/residuary marital, or fractional share).

Pecuniary marital means that the spouse or the marital trust gets the smallest amount needed to eliminate the estate tax. For example, if the estate is $10,980,000, the spouse or marital trust gets $5,490,000. The credit shelter gets the rest, and it gets the benefit of any post-death growth or suffers any post-death loss.

Pecuniary credit shelter means that the credit shelter gets the largest amount possible without any estate tax. For example, if the estate is $10,980,000, the credit shelter gets $5,490,000. The spouse or marital trust gets the rest, and it gets the benefit of any post-death growth or suffers any post-death loss.

Fractional share means that the spouse or marital trust gets the smallest fraction needed to eliminate the estate tax and the credit shelter gets the largest fraction possible without any estate tax. For example, if the estate is $10,980,000, each share gets 50%, and gets 50% of the benefit of any post-death growth or suffers 50% of any post-death loss.

There are some adjustments not discussed here.

I generally prefer the pecuniary marital/residuary credit shelter for the leverage to get the post-death growth out of the surviving spouse's estate.

Sometimes I use the pecuniary credit shelter/residuary marital where I expect nondeductible post-death expenses (for example, in one case, someone has collectibles worth 8 figures, which will be sold upon his death, and there will probably be a substantial amount of selling expenses). Sometimes I use the pecuniary credit shelter/residuary marital where, as a result of the credit shelter trust, there won't be any estate tax in the surviving spouse's estate, and the client prefers this approach because it's easier to understand.

There are occasional situations where the fractional share makes sense.

The lawyer should be familiar with all three, and should recommend the one that's most appropriate for the situation.

I wrote an article on this for the October 1986 issue of the Journal of Taxation: http://kkwc.com/wp-content/uploads/2015 ... 153003.pdf.

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Re: Smart Will (or how to avoid a legal morass)

Post by dodecahedron » Tue Mar 21, 2017 8:14 pm

afan wrote:
dodecahedron wrote:The first $600 of estate income is not subject to tax...


At a 2% dividend rate, $30,000 in a stock fund would generate $600 in income. More if there were bonds. Right, but I was responding to a commenter who suggested that "a simple bank account" coul be enough to generate taxable estate income sufficient to require filing an estate income tax returnThere are a lot of $30k estates. Even a $30K estate invested in stocks or bonds may not have any estate income tax liability if the estate is settled quickly so there's less than a year's worth of estate income before the account is transferred into the heirs' names and/or if there are sufficient deductible estate administration expenses to offset that income.

There may be relatively few people subject to estate tax, but for those who are, estate tax is very important.


Note that you are switching gears in this last paragraph. There is a big difference between estate income tax (reported on Form 1041) and estate tax (reported on Form 706). The number of people who need to worry about estate tax is very tiny, but certainly the folks in that category will find it cost effective to consult estate planning attorneys.

For the rest of us, worrying about estate taxes is a distraction. For me, focusing on income tax efficient charitable giving during my lifetime, including arranging charitable gift annuities, Roth conversions, and designating charities as beneficiaries of any remaining tax-deferred retirement plans should automatically ensure that my taxable estate at death is small enough that I don't have to worry about estate taxes.

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Re: Smart Will (or how to avoid a legal morass)

Post by afan » Wed Mar 22, 2017 9:24 am

Bsteiner,

Thanks. Of course the will must be written while a person is alive, but I thought that the surviving spouse could use disclaimers to adjust the amount of money that went into the credit shelter trust. That would permit them to decide at the time (after the will has been written and the testator has died) how much went into each trust. But I don't know how that works in real life.
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Re: Smart Will (or how to avoid a legal morass)

Post by afan » Wed Mar 22, 2017 9:34 am

As for estate taxes: If you are subject to them, then they are extremely important and definitely a consideration in charitable planning. It would not make sense to ignore them, even when discussing lifetime gifts. Lifetime gifts and bequests should take estate as well as income taxes under consideration.

In my limited exposure to estate settlement of relatives, none have settled in less than a year. All this small number of estates had investment income and paid income taxes. I am sure there are some estates that do settle quickly, but my, again limited, experience would not support assuming things would take place in that time frame.

In the estate with which I am most familiar the jurisdiction waited 6 weeks from receiving the return to opening it and cashing the check. Then waited over a year before reviewing the return. There was no way the estate could settle in a year since they did not even look at the return within a year of receiving it.

In another instance with which I am familiar, arguments about valuation of several assets that sold in arms length transactions went on for years. They finally accepted the original, documented, valuation submitted by the personal representative, but he would have been thrilled if it had been completed in under a year.

States and the federal government want their share of the money and there is little one can do to make them move things along.

As I said, it is a small sample and maybe settling in under a year is common, but I would not count on it.
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Re: Smart Will (or how to avoid a legal morass)

Post by bsteiner » Wed Mar 22, 2017 9:35 am

afan wrote:Bsteiner,

Thanks. Of course the will must be written while a person is alive, but I thought that the surviving spouse could use disclaimers to adjust the amount of money that went into the credit shelter trust. That would permit them to decide at the time (after the will has been written and the testator has died) how much went into each trust. But I don't know how that works in real life.


You can leave your entire estate to your spouse, and provide a disclaimer trust so that if the spouse disclaims some or all of your estate, the disclaimed property will pass to a disclaimer trust. This approach is more common now that the estate tax exclusion amount is $5,490,000 (indexed) and portability is permanent.

If the spouse disclaims within 9 months of your death, then (assuming all of the requirements for a qualified disclaimer are met), the disclaimer won't be treated as a gift by the spouse.

This is different from my reference to the three ways to draft a marital/credit shelter formula. People with larger estates usually provide for a mandatory credit shelter trust using one of these three drafting approaches.

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Re: Smart Will (or how to avoid a legal morass)

Post by bsteiner » Wed Mar 22, 2017 9:57 am

afan wrote:... In my limited exposure to estate settlement of relatives, none have settled in less than a year. All this small number of estates had investment income and paid income taxes. I am sure there are some estates that do settle quickly, but my, again limited, experience would not support assuming things would take place in that time frame.

In the estate with which I am most familiar the jurisdiction waited 6 weeks from receiving the return to opening it and cashing the check. Then waited over a year before reviewing the return. There was no way the estate could settle in a year since they did not even look at the return within a year of receiving it.

In another instance with which I am familiar, arguments about valuation of several assets that sold in arms length transactions went on for years. They finally accepted the original, documented, valuation submitted by the personal representative, but he would have been thrilled if it had been completed in under a year.

States and the federal government want their share of the money and there is little one can do to make them move things along.

As I said, it is a small sample and maybe settling in under a year is common, but I would not count on it.


The time varies considerably. I think we've had a few that were completed in less than a year. On the other hand, we had two that lasted more than 20 years, one due to estate tax refund claims that took a long time to resolve (including filing a refund suit, and then after that was settled, implementing the settlement at the state level); and the other where there was a piece of real estate that no one paid any attention to for a long time and eventually it turned out to be valuable, and then a litigation arose with respect to the property.

Administering an estate well is more important than administering it quickly. If the surgeon said it would take two hours to do a good job but that he/she cut you up jaggedly and stitch you up quickly he/she could do it in one hour but that the recovery would take longer and be more painful, which would you choose?

Until relatively recently, almost all of our estates had to file estate tax returns, so the estate couldn't be wound up until the estate tax proceedings were completed. With a $5,490,000 (indexed) Federal estate tax exclusion amount, and many states no longer having a state estate tax or increasing their exclusion amounts, many estates no longer need to file estate tax returns. So more estates will be wound up faster than in the past.

However, it can still take some time to ascertain the assets and decide how best to deal with them.

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