Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 31 - Wills, Trusts, and Advanced Directives
Chapter 31
Wills, Trusts, and Advanced Directives
I. Key Terms
Administrator (p. 766) Intestate (p. 756)
Administratix (p. 766) Intestate succession (p. 764)
Advance directives (p. 767) Issue (p. 765)
Bequest (p. 756) Last will and testament (p. 756)
Bond (p. 766) Legatees (p. 756)
Codicial (p. 763) Living trust (p. 771)
Conveyance in trust (p. 771) Living will (p. 767)
Declaration of trust (p. 771) Next of kin (p. 765)
Devise (p. 756) Nuncupative wills (p. 760)
Devisees (p. 756) Personal representative (p. 766)
Durable power of attorney (p. 756) Probate (p. 755)
Elective share (p. 760) Probated (p. 766)
Executor (p. 766) Sureties (p. 766)
Executrix (p. 766) Testamentary trust (p. 771)
Exempt property (p. 760) Testate (p. 756)
Family allowance (p. 760) Testator (p. 756)
Fiduciary (p. 767) Testatrix (p. 756)
Forced share (p. 760) Trust (p.770)
Gericide (p. 769) Trustee (p. 770)
Health care proxy (p. 767) Widow’s allowance (p. 760)
Heir (p. 756) Will (p. 756)
Homestead exemption (p. 760)
II. Learning Objectives
1. Give details about the sources of probate law and its relevance to business entities.
2. Identify the formal requirements for executing a will.
3. Determine whether a person who makes a will has the capacity to do so.
4. Explain how the Supreme Court’s ruling involving DOMA affected the law.
5. List the different methods of revoking or changing a will.
6. Outline the three grounds for contesting a will.
7. Describe who will inherit the property of someone who dies without a will.
8. Describe the steps to be taken by an executor or administrator in settling an estate.
9. Discuss the types and purposes of advance directives.
10. Differentiate among the various types of trusts and determine when they might be used.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
III. Major Concepts
31-1 Sources and Relevance of Probate Law
Because each state’s law is different on the subject of probate law, it is necessary to check
one’s own state law when dealing with probate matters. Furthermore, the subject of
probate law is relevant to all forms of business entities.
31-2 The Law of Wills
The terms will, last will and testament, testate, intestate, testator, testatrix, bequest,
devise, legatees, devisees, and heir are frequently used in the field of probate law. Any
person who has reached adulthood and is of sound mind may make a will. Wills must be
in writing, signed by the testator, and attested to in the testator’s presence by two
witnesses in most states. In some states, no formalities are necessary when a holographic
will is made. Surviving spouses are given protection through such provisions as a family
allowance, a homestead exemption, exempt property, and the rights of dower and curtesy.
Spouses in states that recognize same sex marriages can now claim all of the protection
methods available to traditional spouses regarding estate planning. Also, because of the
Supreme Court’s rulings in the Windsor and Obergefell cases, the surviving spouse of a
same sex marriage can now claim an inheritance as an exemption when paying federal
taxes. A will may be revoked by burning, tearing, canceling, or obliterating the will with
the intent to revoke it; by executing a new will; and in some states, by the subsequent
marriage of the testator. A will may be contested on the grounds of improper execution,
unsound mind, and undue influence. When people die without a will, their property
passes to others according to the law of intestate succession, which varies from state to
state. Special rules apply when people die simultaneously. Separately owned property
passes as if its owner had survived the other person. Property owned jointly by both
decedents is distributed equally. Insurance proceeds are payable as if the insured survived
the beneficiary when they both die at the same time. When people die owning assets,
their estates must be probated. Heirs are notified, and an executor or administrator is
appointed by the probate court.
31-3 Advanced Directives
Advance directives are written statements in which people give instructions for their
future medical care if they become unable to direct their care themselves. The most
common type of advance directive is the living will, which is a written expression of a
person’s wishes to be allowed to die a natural death and not kept alive by heroic or
artificial methods. Another vehicle that is used for this purpose is the health care proxy—
a written statement authorizing an agent to make medical treatment decisions for another
in the event of incapacity.
31-4 The Law of Trusts
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
Trusts are used, among other reasons, to save taxes, provide for the needs of young
children, and prevent money from being squandered easily. They may be created to take
effect while a person is alive or after a person dies. When a trust is established, title is
split between the trustee, who holds legal title, and the beneficiary, who holds equitable
or beneficial title. The trustee manages the trust fund for the beneficiary.
IV. Outline
I. Sources and Relevance of Probate Law (31-1)
A. Probate
1. Probate is the process of handling the will and the estate of a deceased person.
2. Each state has its own laws governing the writing of wills and the settling of estates.
3. Not all states have adopted the Uniform Probate Code.
B. Relevance of Probate to Business
1. When a sole proprietor dies, the assets of the deceased’s business pass to the
deceased’s heirs.
2. When owners of a corporation die, their shares of stock pass to their heirs.
3. When a partner in a partnership dies, the partnership automatically dissolves.
C. Probate Terminology
1. A will is a formal document that governs the transfer of property at death.
2. A person who dies with a will is said to die testate.
3. A person who dies without a will is said to die intestate.
4. Real property left by a will is known as a devise.
5. Those who receive property by will are referred to as beneficiaries.
6. An heir is one who inherits property.
7. A durable power of attorney is a document authorizing another person to act on one’s
behalf with words stating that is to survive one’s incapacity or is to become effective
when one becomes debilitated.
II. The Law of Wills (31-2)
A. Requirements for Executing a Will
1. Laws governing the making of wills are not uniform.
2. A will that is properly executed according to the laws of one state will be given full
faith and credit in another state.
3. Any person who has reached the age of adulthood and is of sound mind may make a
will.
4. With the exception of a nuncupative will, a will must be in writing and signed by the
testator with witnesses as required by state law.
5. Problems may be avoided by the testator signing only one will, not an original and a
copy.
6. In some states the testator must sign the will in the presence of the witnesses.
7. In many states, persons and their spouses who witness a will may not receive gifts
under the will unless there are other witnesses or they will receive only the amount
they would have received in the absence of a will.
8. A holographic will is one that is not witnessed but is written entirely in the
handwriting of the testator.
9. Approximately half the states recognize holographic wills as valid.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
10. Oral wills made by persons in their last illness or by soldiers and sailors in actual
combat are nuncupative wills.
11. Nuncupative are valid only in some states and are restricted to the giving of personal
property.
B. Protection of Spouses and Children
1. Protection of Spouses
a. Some states provide for a family allowance which is an amount of money taken
from the decedent’s estate and given to the family to meet its immediate needs
while the estate is being probated.
b. A homestead exemption puts the family home beyond the reach of creditors up to
a certain limit.
c. Exempt property is certain property of a decedent that passes to the surviving
spouse or children and is beyond the reach of creditors.
d. In some states dower and curtesy are available, providing surviving spouses with
certain property rights in real property.
e. Surviving spouses are assured a share of a deceased spouse’s estate and may elect
to take a forced, or elective, share.
2. Protection of Children
a. Children who can prove that they were mistakenly, rather than intentionally, left
out of a parent’s will are protected by the laws of most states.
b. A testator who wishes to disinherit a child should name the child in the will and
make the statement that the child was intentionally omitted.
c. Adopted children are given the same legal rights as natural children.
C. Advantages and Disadvantages of the Windsor Ruling
1. The Windsor case had a tremendous impact on financial planning.
2. After Windsor, the surviving spouse of a same sex marriage could claim an
inheritance as an exemption when paying federal taxes.
3. Because of the Court’s ruling in Windsor, employer-provided health coverage for an
employee’s same sex spouse was no longer taxable.
4. After Windsor, same sex married couples were no longer able to file income tax
returns as single individuals.
D. The Obergefell v. Hodges Case
1. In the case of Obergefell v. Hodges, five justices ruled that any state action, legislative
or constitutional, that limited the definition of marriage to opposite sex couples
violated the due process and equal protection clauses of the 14th Amendment.
2. The majority ran through a series of cases, each one ruling that under the Due Process
Clause the fundamental right to be married cannot be procedurally dismantled or
limited without some compelling state reason to do so.
E. Changes in Estate Planning
1. Spouses in a same sex marriage can now claim all of the protection methods available
to traditional spouses in estate planning.
2. The family allowance, the homestead exemption, and the exempt property provisions
should be available to same sex married couples.
3. Obergefell may result in additional questions involving restrictions on marriage such
as provisions regarding marrying several people simultaneously or marrying someone
of a close genetic relationship.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
F. Revoking, Changing, and Contesting a Will
1. With state variations, a will may be revoked in any of the following ways:
a. Burning, tearing, canceling, or obliterating the will with the intent to revoke it
b. Executing a new will
c. Depending on the state, marriage, divorce, or annulment.
2. A codicil is a formal document used to supplement or change an existing will that
must be executed with the same formalities as a will.
3. Only persons who would inherit under an earlier made will or under the law of
intestacy are allowed to contest a will.
4. A will may be contested on any of the following grounds:
a. Improper execution
b. Unsound mind
c. Undue influence
G. Dying Without a Will
1. When people die without a will, their property passes to others according to the
various state laws of intestate succession.
2. Personal property is dispersed according to the law of the state where the deceased
permanently resided.
3. Real property passes according to the law where the property is located.
4. Rights of a surviving spouse differ from state to state and may be affected by issues
including whether the deceased is survived by issue or blood relatives.
5. Subject to the rights of a surviving spouse, property typically passes in equal shares to
the deceased’s children, with the issue of any deceased child taking that child’s share.
6. If the deceased has no issue, other relatives inherit.
H. Simultaneous Death
1. The Uniform Simultaneous Death Act may be applied when the inheritance of
property depends upon the time of death, and there is nothing to indicate that the
parties died other than at the same time.
2. Primary sections of the act are as follows:
a. The separately-owned property of each person passes as if he or she had survived
unless a will or trust provides otherwise.
b. Property owned jointly by both the deceased is distributed equally to the
husband’s heirs and the wife’s heirs.
c. When the beneficiary of an insurance policy dies at the same time as the
deceased, the proceeds of the insurance policy are payable as if the insured had
survived the beneficiary.
I. Settling an Estate
1. When a person dies owning assets, his or her estate must be probated and settled
under the supervision of the court.
2. If a will exists, it usually names a personal representative called an executor (male) or
executrix (female) who is the person named in the will to carry out its terms.
3. A court may appoint a person to settle an estate of a person who has no will or when
an executor or executrix named in a will fails to act, and that person is called an
administrator (male) or administratrix (female).
4. In states that have adopted the Uniform Probate Code, people who settle an estate are
called personal representatives.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
5. The person charged with settling an estate may be required to post a bond.
6. The person charged with settling an estate is a fiduciary.
III. Advance Directives (31-3)
A. Living Wills and Health Care Proxies
1. Advance directives are written statements in which people give instructions for future
medical care if they become unable to do so themselves.
2. A living will is the written expression of a person’s wishes to be allowed to die a
natural death and not be kept alive by heroic or artificial methods.
3. A health care proxy is a written statement authorizing an agent to make medical
treatment decisions for another in the event of incapacity.
B. The Right to Die and the Supreme Court
1. The Government’s Compelling Interest in Life
a. In 1990 the United States Supreme Court ruled that the right to die is guaranteed
by the Due Process Clause of the United States Constitution.
b. According to the Supreme Court at the point of viability, the government has a
compelling interest in preserving the life of a fetus that outweighs the mother’s
right to have an abortion; and the point of viability has become a moving target.
2. Living Wills and the Right to Die
a. According to the Supreme Court, the government cannot prevent passive
euthanasia in accordance with a living will because it must protect due process,
but it can prevent abortion because it has a compelling interest in preserving life.
b. The balancing act between the government’s compelling interest in life and the
rights guaranteed by due process is still open to debate.
3. The Science Court Revisited
a. A proposed science court would be made up of scientists, engineers, and other
experts educated in the discipline and the industry involved in a dispute.
b. Issues involving matters such as living wills and the right to die would be
candidates for a science court.
IV. The Law of Trusts (31-4)
A. Background
1. A trust is a legal device by which property is held by one person, the trustee, for the
benefit of another, the beneficiary.
2. The property that is held in trust is the corpus or trust fund.
3. State rules, such as the rule against perpetuities, may prevent property form being
held in trust indefinitely.
B. Types of Trusts
1. A testamentary trust is a trust that is created by a will.
2. A living trust comes into existence while the settler is alive and is established by
either a conveyance in trust or a declaration of trust.
3. In a conveyance in trust, the settler conveys away the legal title to a trustee to hold for
the benefit of either the settler or another as beneficiary.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
4. In a declaration of trust, the settler holds the legal title to property as trustee for the
benefit of some other person to whom the settler now conveys the equitable title.
5. A living trust may be either irrevocable or revocable.
6. A spendthrift trust, which is not permitted in some states, is designed to provide a
fund for the maintenance of a beneficiary and, at the same time, to secure the fund
against that person’s improvidence or incapacity.
7. A charitable or public trust is one established for charitable purposes, and the rule
against perpetuities would not apply.
8. A sprinkling trust, or spray trust, allows the trustee to decide how much will be given
to each beneficiary rather than have the settlor make the decision.
C. Obligations of the Trustee
1. The trustee is obligated by law to use a high standard of care and prudence in the
investment of funds held by the trust.
2. A trustee relationship is one of great and continuing responsibility.
V. Background Information
A. Cross-Cultural Notes
1. The modern spendthrift trust evolved because of unjust restrictions on the property
rights of married women under British common law. Up until the nineteenth century
in England, a woman’s property was automatically transferred to her husband upon
marriage. Sometime after 1700, however, fathers began to set up spendthrift trusts for
their daughters’ property. Today, spendthrift trusts are not allowed in England,
although some trusts protective of beneficiaries are permitted.
B. Historical Notes
1. While some areas of early Greece recognized the concept of wills, the development of
Roman law furthered the modern concept of wills. A will is mentioned in the Old
Testament under which Jacob left Joseph a portion of inheritance double that of his
brothers. Under the English Statute of Wills (1540) and according to early American
law, a married woman was not allowed to dispose of real property. She could dispose
of personal property only with her husband’s consent.
2. In England, the Wills Act (1837) broadened individuals’ rights to include disposal of
both personal and real property.
3. The first known will was found carved on the tomb of a man named Nek’ure, the son
of an Egyptian Pharoah who died n 2601 B.C.. The will divided fourteen towns and
two estates among Nek’ure’s wife, three children, and another woman. The will states
that Nek’ure composed it “while standing on [his] own two feet and not ailing in any
respect.”
4. A brief will, dated January 19, 1967, was written by Karl Tausch of Langen, Hesse,
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
Germany. It said, Vse zene, which is Czechoslovakian for “all to wife.” Another will
was scratched into a metal identification tag worn by a British soldier who had been
lost at sea. A microscope had to be used to see the letters, which read, “All to
mother.”
5. The law of primogeniture in Europe—the eldest son’s right to inheritance— had its
origins in Medieval Europe. Primogeniture was abolished in the United States shortly
after the Revolutionary War.
C. State Variations
1. In Puerto Rico, spouses and also children have inheritance rights.
2. Roughly half the states permit holographic wills. Some limit them, for example, to
those serving in the military.
3. Under Roman law, a child was entitled to “legitime,” which was his or her share of
parents’ property, and parents could not contest the child’s right. Louisiana is the only
state to still abide by legitime under certain situations.
4. Iowa has state laws that are generous to spouses in cases of intestacy. If the deceased
leaves no children or only children from marriage to the surviving spouse, the spouse
receives the whole estate. If the deceased leaves children that are not the spouse’s,
then the spouse receives $50,000 plus half of the estate over that amount, and the
children receive the rest.
5. Most states have statutes that provide that a beneficiary who has murdered the
deceased shall not receive any benefits from the deceased’s will or in intestacy
proceedings.
6. The Washington Post has an article titled “Brittany Maynard, as Promised, Ends Her
Life at 29” and a video regarding her actions to end her life under the Oregon Death
With Dignity Act based on a terminal illness available at
https://www.washingtonpost.com/news/morning-mix/wp/2014/11/02/brittany-maynar
d-as-promised-ends-her-life-at-29/.
D. Quotations
1. I have nothing; I owe a great deal; the rest I give to the poor.
— from the will of François Rabelais (1483–1553), French satirist
2. I give unto my wife my second best bed with the furniture.
— William Shakespeare (1564–1616), British dramatist and poet
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
3. Put not your trust in money, but put your money in a trust.
— Oliver Wendell Holmes (1809–1894), physician, author, and father of U.S.
Supreme Court justice of the same name
VI. Terms
1. Will comes from the Old English words willa and wille, in use before the twelfth
century and meaning intention or desire.
2. The word heir comes from the Middle English eir.
VII. Related Cases
1. Over forty wills surfaced immediately following the death of eccentric billionaire
Howard Hughes. The most famous was the “Mormon Will,” so-called because it was
discovered on the desk of a Mormon official in Salt Lake City. The will stipulated that
a Utah gas station attendant, Melvin Dummar, was entitled to one-sixteenth of
Hughes’s estate. Dummar claimed that he had once picked up a disheveled old man,
later discovered to be Howard Hughes, on a Nevada highway and given the man a lift
to Las Vegas. A Nevada court eventually ruled that the Mormon Will was a fake,
despite testimony from Hughes’s associates that it was authentic. The 1980 movie
Melvin and Howard was based on the case.
2. A mother died with a will naming her sole surviving daughter as beneficiary. Her
previously-deceased daughter had three children who sued to receive a share,
claiming that they were mistakenly left out of the will. The surviving daughter
attempted to show an earlier will that explicitly stated the granddaughters were to
receive nothing. The court ruled in the granddaughters’ favor, stating that the previous
will had been revoked and there was no evidence in the final will that the
granddaughters had been omitted intentionally. Armstrong v. Butler, 553 S.W.2d 453
(Ark. 1977).
3. The case of In re Estate of David R. Leath, 294 S.w.3d 571 (Tenn.Ct.App. 2008),
involved an effort by the decedent’s widow and stepdaughters to establish a copy of a
lost will as the decedent’s last will and testament. The defendant was shot and killed.
After his death, a dispute arose between his wife and the decedent’s adult daughter
from a previous marriage. Each claimed that the other shot the decedent. In a dispute
over his estate, the court ruled that there was insufficient proof to establish that a will
leaving the bulk of the decedent’s estate to the wife was lost as opposed to
intentionally destroyed.
VIII. Teaching Tips and Additional Resources
1. Some states have information available regarding living wills and other advance
directives. For example, information provided by the State of Tennessee regarding
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
advance directives is available at https://tn.gov/health/article/advance-directives.
Additional information is available from the Public Broadcasting Service at
http://www.pbs.org/now/shows/541/living-wills.html.
2. An interesting document is the last will and testament of George Washington which is
available on the web site of the Ashbrook Center at
http://www.ashbrook.org/library/18/washington/will.html. Wills of some other
famous people are available at
http://livingtrustnetwork.com/estate-planning-center/last-will-and-testament/wills-of-t
he-rich-and-famous.html.
3. Additional information on estate and gift taxes can be found on the web site of the
Internal Revenue Service at
http://www.irs.gov/businesses/small/article/0,,id=98968,00.html
4. A significant amount of information regarding estate planning is available from the
State Bar of California at
http://www.calbar.ca.gov/Public/Pamphlets/EstatePlanning.aspx.
5. Information on estate planning and retirement is available from AARP at
http://www.aarp.org/money/estate-planning/.
6. The National Law Review discusses changes to estate and gift tax law at
http://www.natlawreview.com/article/summary-estate-and-gift-tax-law-changes-2015.
7. Administration of Wills, Trusts, and Estates, by Gordon W. Brown is written in a style
similar to this book and contains much information about wills, trusts, and estates.
8. After explaining that only interested persons may contest a will, have students
brainstorm reasons why this may be a good or bad requirement.
9. Emphasize the risks involved in making a will without legal consultation from a
qualified estate-planning attorney.
10. Probate proceedings can be quite expensive, as much as 10 percent even in
uncomplicated cases. Estate tax is also a concern. Uncertainty exists regarding future
percentages that will be charged in estate tax. Currently, a surviving spouse does not
have to pay estate taxes on inheritances received from a deceased spouse.
11. Help students understand the similarities and differences between wills and trusts by
explaining that both are legal means of transferring assets to other people. A will
names an executor to distribute the assets, while a trust names a trustee to do the same
thing after holding the assets according to the trust’s terms. However, a will is carried
out upon a person’s death, whereas the execution of a trust can remain open long
afterward. Moreover, a will is a public record (anyone can examine a person’s debts
and assets), and a trust (except a testamentary trust) is private. Wills are subject to
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 31 - Wills, Trusts, and Advanced Directives
probate taxes. Trusts may avoid probate taxes, and they are becoming more popular
as a method of saving taxes.
12. Invite a trust officer of a local bank and an estate-planning attorney to talk to your
class about the advantages of creating a trust. Ask these experts to explain how the
rules in your state vary from other states regarding trusts.
13. Divide students into teams and assign each team one type of trust (testamentary,
living, spendthrift, charitable, or sprinkling). Have these teams research their trust’s
history, local requirements and limitations, and current usage. Then have each team
give a presentation as to the benefits of their trust.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
