Wills and Trusts Basics - National Association of Legal Assistants

Charting the ComparisonsWills and Trusts Basicsby Molly J. Fischer, CLAWills and trusts are often key components in estate planningstrategies. Understanding the terms and fundamental conceptsof these instruments is helpful in keeping estate plans ontrack and compliant with the law as well as the needs andwishes of decedents, inheritors, and beneficiaries.Some basic definitions:Will—a legal document by which an individual describesproperty owned at death and designates to whom that propertyis to be distributed. A will is created during a person’s lifetimeand “speaks” at their death.The will can be a good foundation for an estate planbecause it outlines the wishes of the testator (maker of thewill). It directs the disposition of personal belongings after thetestator’s death and designates a guardian for minor children.A state court proceeding called a “probate” may be requiredto effect the transfer of the decedent’s titled assets to thebeneficiaries as designated by the will. The testator maychange or revoke the will at any time before death.Trust—a legal entity created by a settlor (grantor, ortrustor) for the benefit of designated beneficiaries under thelaws in the state of residence. A trust is either “revocable”or “irrevocable.”In a revocable trust, the settlor reserves the right toamend or cancel the trust at any time before death. An irrevocabletrust is a trust that cannot be amended and terminates asprovided in the trust document.Some types of trusts include: an inter vivos trust, also knownas a “living trust” or “family trust” (the subject of this article); a“credit shelter trust;” “Qualified Terminable Interest Property”(Q-Tip) trust; life insurance trust; charitable remainder trust; testamentarytrust (established within a will); and special needstrusts. Each trust has a specific purpose, and these are but a few.When comparing simple wills and trusts in basic estateplanning, the living trust is a customary choice. A living trustis created by a settlor and operated during the settlor’s lifetime.Almost anything can be placed in a trust—bank accounts,stocks, bonds, real estate, life insurance, and personal property.Elements of a WillI. Heading or Title.II. Exordium and Publication Clause. Identifies thetestator, state of domicile (to establish jurisdiction),age, testamentary capacity, and declares to the publicthat the document is the testator’s last will.III. General Revocatory Clause. Revokes all previous wills.IV. Provision for payment of debts and funeral expenses(optional).V. Instructions for funeral and burial (optional).VI. Appointment of Fiduciaries. Designates the personalrepresentative of the will and if the personalrepresentative shall serve with or without bond.Appoints a personal and property guardian forminors or for a person with a disability.VII. Specific testamentary gifts. Provides for thedisposition of property as the testator chooses.Legacies are gifts of money, bequests are giftsof personal property and devises are gifts ofreal property.VIII. Provision for residue of estate. The residuary clausetransfers the remaining property of an estate that hasnot been specifically given to the beneficiaries,including any additional property that may comeinto the estate after the will has been executed or afterthe testator’s death.IX. Simultaneous death clause. A clause in a will thatdetermines the distribution of property in the eventthere is no evidence as to the priority of time ofdeath of the testator and another, usually thetestator’s spouse.X. Testamentary trust clause (optional).XI. Testimonium clause in which the testator states thatthe will was freely signed and dated, and whichrequests the proper number of witnesses to do likewise.XII. Testator’s signature. The testator must sign the will inthe presence of witnesses—usually two.20FACTS & FINDINGS / FEBRUARY 2003

XIII. Attestation clause of witnesses. Witnesses state thatthey have attested the testator’s signature on the will.XIV. Witnesses’ signatures and addresses. State statutes maygovern proper wording for the attestation clause andproper procedure for witnesses’ signatures. Somestates require the witnesses’ signatures to be notarized.Elements of a TrustI. Declaration/Creation of the trust. A settlor is anindividual who intends to create the trust. To be asettlor, a person must own a transferable interest inproperty, have the right or power of disposing of aproperty interest, and have the ability to make a validcontract. The same person cannot be the settlor,trustee, and beneficiary, but the same person could bethe settlor and trustee, or the settlor and beneficiary.II. Designation or appointment of one or more trusteeswho are named to administer and manage the trust.The trustee(s) hold legal title to the trust property forthe benefit of the beneficiary. The trustee is afiduciary and, as such owes fiduciary duties to acthonestly and loyally for the sole benefit of the beneficiary.III. Create powers of the trustee. Most state statutesspecify fiduciary powers, but also permit the creatorto expand or limit those powers by inserting aprovision to that effect in the trust. The specificduties of the trustee should be clearly spelledout (Helewitz 77).IV. A legal purpose for the trust must exist. The trust’spurpose may serve the private interests of the creatorto benefit private persons, known as a private trust, ormay be established to provide charitable benefits,known as a public trust.V. There must be trust property, real or personal, thatmust be transferred to the trust. The trust cannotexist until the property has been legally transferred tothe trust. After the creation of a trust, title toproperty placed in the trust must pass to at least twopersons. The title is “split” into legal title andequitable title. The trustee receives the legal title, andthe beneficiary receives the equitable title.VI. One or more beneficiaries must be named to receivethe benefits (income and/or principal).VII. A termination point must be established. Privatetrusts terminate within a statutorily determinedperiod of time, and the trust should indicate thepoint at which the trust will end, either by particulardate or contingent event.VIII. The trust should indicate a remainder interest. Theperson or persons in whom the legal and equitabletitles will merge.IX. Signature of the creator(s). Many jurisdictions requirethe document to be signed by at least one trustee andwitnessed or notarized. If the trust is a testamentarytrust, the creating document is the will, which mustmeet statutory requirements for the execution of wills.Alternatives to a Will or TrustThere are other ways to hold title to property that avoidprobate and are transferred to the beneficiary without anyadministration or trust necessary.I. Joint tenancy with rights of survivorship.II. Community property with rights of survivorship(an alternative in community property states).III. Tenancy by the entireties—joint owners are husbandand wife (check state laws).IV. “Pay on Death” (POD) provision to bondregistration, bank accounts, savings accounts or“transfer on death” (TOD) registration for stocks,brokerage accounts and mutual funds. (See UniformTransfer On-Death Security Registration Act).V. Proceeds of a life insurance policy payable to anamed beneficiary.VI. Employment benefits contracts that contain anamed beneficiary.VII. Annuity contracts with a named beneficiary.VIII. IRA’s with a named beneficiary.See charts on Pages 22 and 23References:Hower, Dennis R. Wills, Trusts, and Estate Administrationfor the Paralegal, Minnesota: West Publishing Company, 1996.Koerselman, Virginia. CLA Review Manual, SecondEdition, New York, West Publishing, 1998.Helewitz, Jeffrey A. “A Matter of Trusts—What it takes toproperly draft a legal trust,” Legal Assistant Today, May/June2000, Volume 17, Issue 5: pp. 77–78.Molly J Fischer, CLA, works in the areas of estate planning, wills,trusts, probates, guardianships, and Medicaid planning with the Law Officesof Patricia F. Winnie, Esq., Reno, NV. She holds BS and MS degrees inDesign, Merchandising and Consumer Sciences from Colorado StateUniversity, and has an Associates Degree in Applied Science in LegalAssistant studies from Truckee Meadows Community College. She teachesEthics for paralegals at Truckee Meadows Community College and is amember of the Sierra Nevada Association of Paralegals, having served aspresident and current NALA liaison.FACTS & FINDINGS / FEBRUARY 2003 21

Charting the Comparisons: Wills and Trusts Basicscontinued from page 22Terms & DefinitionsDefinitionand/or condition Term Used in Wills Term Used in TrustsCreator of the legal document Testator / Testatrix Trustor, Grantor or SettlorFiduciary managing the “estate” Personal Representative, Trustee orExecutor, ExecutrixSuccessor TrusteeAdministrator, AdministrarixAny person to whom the decedent’s Beneficiary Beneficiaryproperty is given or distributed.Two or more persons who attest Witnesses [A trust does not requireand also sign the will, in somewitnesses. However, thestates the witnesses signaturestrustor’s signatures areare notarized.usually notarized.]Personal and real property. Estate Trust property /corpus.The form of ownership of trustEquitable Title to propertyproperty held by the trusteegiving the trustee the right tocontrol the property.A right of the party to whom it (theLegal Title to propertyequitable or beneficial title) belongsto the benefits of the trust.Comparative Advantages/Disadvantages/EffectivenessWillsUpon death, the will becomes a public document.The probate process is controlled by the court.The court insures that creditors are paid,administrative fees and costs are paid, andbeneficiaries are paid according to the will.The court’s probate process protects the fiduciaryfrom further creditors claims after the time periodfor notice has expired. All claims against the estateare forever barred. Creditors are barred from assertingclaims against the heirs.TrustsA trust is a private document. The courts do nothave any control over trust assets.However, if there is a dispute between beneficiaries andtrustees or if a trustee’s handling of the trust principle orincome is in question, the issues may be taken before theprobate court. If the court accepts jurisdiction, the trust isno longer a private document.The trustee has the fiduciary responsibility to ensure thatthe settlor’s bequests are fulfilled exactly as prescribed inthe trust document. The distribution process is controlledby the trustee, unsupervised and with no guarantee to thebeneficiaries that the trustee is following the trustinstructions exactly.The trustee and beneficiaries are liable to creditors of thetrust. Some jurisdictions provide statutes for notice tocreditors in a trust administration that serve to protect thetrustee and beneficiary from perpetual creditor claimsagainst the trust.22FACTS & FINDINGS / FEBRUARY 2003

A Living Trust can help preserve and increase an estatewhile the settlor is alive, and offers protection should thesettlor become disabled. A guardianship of an incapacitat-ed adult may be required to protect the person and tomake healthcare decisions.WillsProbate can be cumbersome, time-consuming, andexpensive. However, most states have informaladministration of small estates which do not requireprobate or have shortened the probate process thusreducing the expense of probate.The will doesn’t take effect until the testator dies.Probate and estate settlement costs may decreasethe size of the estate.Trust assets that are not properly titled in the name ofthe trust are subject to probate.The Will has no administration during thetestator’s lifetime.Durable powers of attorney for estate management andhealth can be created for the testator that are valid evenif the testator becomes disabled or incapacitated. Aguardianship of an incapacitated adult may be requiredto protect the person and to make healthcare decisions.Interpretations of wills can vary from state to state.Assets left to a spouse are subject to federal estatetax upon the surviving spouse’s death.An ancillary probate must be established by the courtto transfer or sell real property in a state other thanthe testators domicile.A professional manager of assets can be named as thepersonal representative of the testators estate,(i.e., a bank’s trust department).Federal Estate Taxes are not avoided with a will.However,in the case of a married couple leavingeverything to each other, no federal estate tax will bedue after the death of the first spouse no matter howlarge the estate.A Will contest is possible, although usuallydifficult to challenge.TrustsThe initial cost to establish the trust and any amendmentsto the trust as the laws change can be expensive. Theliving trust, because of the transfer of documents and itsoperation as a viable entity during the grantor’s lifetime,make it more expensive to draft and implement than a Will.A living trust takes effect when the grantor/settlor signsit or on a date specified by the grantor/settlor.Trust litigation may decrease the size of the estate.A Living Trust avoids probate because the property isowned by the trust, so technically there is nothing for theprobate courts to administer. Careful management of thetrust assets is required to avoid probate.The living trust is a living document and careful ongoingadministration during the lifetime of the Trust is necessary.All assets must be transferred into the trust name. Realproperty deeds must be transferred and all lien holders(mortgagees) must be informed. All bank accountsreopened in the name of the trust, all partnership andstock interest must be transferred, and each of thetransfers typically requires special documentation bythe transfer agent.Trusts are established under the laws of the state wherethe trust is written. Statutes of a community property statediffer on the division and distribution of property anddepending on if the character of the property hasremained community or separate property within the trust.Assets left to a spouse are subject to federal estate taxupon the surviving spouse’s death. A trust can offer sometax relief for the trust after the last settlor’s death, thusbenefiting heirs of the trust.A trust can make the transfer of real property in morethan one state easier.Through a trust, an arrangement for assets to beprofessionally managed by a trustee can be established.Federal Estate Taxes are not avoided with a trust.However, in the case of a married couple leavingeverything to each other, no federal estate tax will bedue after the death of the first spouse no matter howlarge the estate.It is very difficult for disgruntled heirs to challengea Living Trust.FACTS & FINDINGS / FEBRUARY 2003 23