|
|
|
WILL DRAFTING CONSIDERATIONS Presented to the College of Estate Planning Attorneys March 6, 2003 By: Thomas J. Murphy Murphy Law Firm, Inc. 51 West Elliot Road, #106 Tempe, AZ 85284 (480) 838-4838 tjmurphy@primenet.com
1. Acknowledging Gifts and Loans and Treating Them As Advancements Make it clear how lifetime gifts or loans are to be treated – and ascertain which transactions are gifts and which are loans. If they are gifts, should they be treated as an advance of an inheritance? Suggested clause for simple estate: The shares shall be adjusted to take into consideration the fact that I currently share a residence with my daughter, XXX, that is jointly titled in our names. My estate shall be augmented to include my one-half interest in my home. In other words, the value of my one-half interest in my home that passes to XXX by operation of law shall be considered as part of the fifty percent share of my estate that passes to XXX. Suggested clauses for more involved estates: Equalization of Inheritance — Gifts. During the lifetime of Grantors, Grantors may make gifts to children, a child’s spouse, descendants and descendant’s spouse, in trust or otherwise. Grantors direct that all children and their spouses as a class and all descendants and their spouses as a class respectively receive, in gifts, special distributions, or otherwise, as nearly as possible, equal amounts from Grantors as each other Beneficiary of the same class. If Grantors have made unequal gifts among the child or among the descendant respectively, as evidenced by gift information in Grantors’ attorney’s office, accountant’s office or with the records of the Internal Revenue Service, then Trustee shall allocate an additional amount of either principal or income to the Trust share of respective child or descendant which received lesser amounts in gifts from the Grantor. In calculating equality, Trustee shall use present value tables using the bank prime rate for that period. 5. Special Adjustment of Inheritance. Trustee shall make certain special adjustments to the distributions as follows: a. Education of All Children. Before making the allocation of Trust funds as provided in Paragraphs C.1 (Separation into Shares and Disposition) and C.2 (Share for After Born Child) of this Article if there are any children of Grantors who have not completed a college education, then Trustee shall set aside an amount to be determined by Trustee for the education of each child who qualifies for this benefit. This additional amount shall augment the Trust share of the qualifying child and be administered as other property in that child’s respective Trust share until the property is distributed or reallocated in accordance with the terms of this Paragraph. The purpose of this provision is to achieve fairness among the children by providing each child with as much education as possible and reasonably necessary to achieve their career related goals, plus an equal division of the remaining Trust property. If a child for whom an education fund was set aside elects to attend an alternative educational training program other than college, this shall be treated as equivalent to a college education for purposes of funding hereunder. The Grantors will consider that an apprenticeship program for a non-white-collar trade to be the equivalent of college within the meaning of this provision, it being the Grantors’ intention not to discriminate against children who would prefer and be better qualified for a "blue-collar" profession. In order to have adequate funds, if principal is inadequate to educate all Grantors’ children through the youngest, Trustee is authorized to withhold income payments to the children who have completed college educations and accumulate income to be used to educate the younger children through four years of college. The remaining income and principal shall be divided equally among all Grantors’children. To determine the educational fund for each child, Trustee shall meet with each child and an educational consultant selected by mutual agreement between the Trustee and child to set forth the child’s individual educational objectives. Should the child be under the age of 16 years, the educational consultant shall be selected by Trustee alone. Trustee, the child and the educational consultant selected shall set up a budget which will allow the child to reach his educational objectives. The educational budget and annual allowance shall be reviewed annually by the Trustee, the educational consultant and the child. This special fund shall be reallocated and distributed as otherwise provided under the Children’s and Descendants’ Trusts in accordance with Paragraphs C.1 (Separation into Shares and Disposition) and C.2 (Share for After Born Child) of this Article when one of the following occurs: (1) the child notifies Trustee in writing that benefits under this special fund shall not be requested; (2) the child dies or becomes disabled before completing his education under this special fund; or (3) the child has reasonably achieved the child’s educational or carrier goal in the absolute discretion of Trustee. b. Wedding Expenses. Before making the allocation of Trust funds as provided in Paragraphs C.1 (Separation into Shares and Disposition) and C.2 (Share for After Born Child) of this Article if there are children of Grantor who have not yet married, then Trustee shall set aside sufficient funds to pay for a wedding and reception in an amount to be determined by Trustee for the first wedding only of each unmarried child so that it is comparable to the weddings of the married children. Such amount may not only be used for the wedding ceremony, reception, and other wedding festivities, but may also be used for a honeymoon, wedding presents and all other costs of a lawful first marriage. It is the intent of this provision to encourage the children of Grantor to marry and have families comparable to or better than Grantor’s family. This additional amount shall augment the Trust share of such qualifying child and be administered the same as other assets in that child’s Trust share until the assets are distributed or reallocated in accordance with the terms of this Paragraph. This special fund shall be reallocated and distributed as otherwise provided under the Children’s and Descendants’ Trusts in accordance with Paragraphs C.1 (Separation into Shares and Disposition) and C.2 (Share for After Born Child) of this Article when one of the following occurs: (1) the child notifies Trustee in writing that benefits under this special fund shall not be requested; or (2) the child dies or becomes disabled to the extent that marriage is impossible 2. Explain Unusual Bequests Or Omitted Bequests Or Unusual Order Of Priority For Fiduciary Appointments. It is not always clear what the testator is trying to accomplish so give the testator an opportunity to explain or at least to indicate that this is not an adverse reflection on the beneficiary. Suggested clause: "I make no provision for my son, XXX, whom I love and admire very much. This is not meant, in any way, to reflect adversely on him." 2a. Multiple Wills To Prevent Contest. I have a new policy that if there are significantly unequal bequests, the testator must agree to return two more times within the next year (ie, six months apart) to re-execute the will, so that there will be three wills to contest executed over the span of a year. 3. Tax Allocation Clause for Taxable Estates Most wills that I see provide that the residuary probate estate pays for all estate taxes. With more and more estate assets passing outside of probate, this can create a real and unforeseen problem, especially if the beneficiaries are different (as exemplified in the recent Fogelman case, 197 Ariz 252 (CA1, 2000). See also ARS 14-3902, ARS 42-4001 & IRC Sec. 2206. A similar clause should be considered for debts and their priority (ie, secured or unsecured). Suggested clause: I direct that all estate, inheritance, succession, transfer or other death taxes, to include penalties and interest, paid to any domestic or foreign taxing authority with respect to all property taxable by reason of my death shall be charged against my entire estate. For these purposes, my estate shall be my federal gross estate as defined by applicable federal estate and gift tax law (currently Section 2031 of the Internal Revenue Code) and shall include any and all interests in property, real or personal, tangible or intangible, wherever situated, that I have at the time of my death, to include any and all property passing outside the probate process such as proceeds from life insurance policies, retirement plans and other employee benefit plans as well as jointly titled property and property with payable-on-death designations. Payment of such taxes shall be equally allocated among all estate assets. The prorated allocation shall be made in the proportion that the fair market value of the property received by each person interested in the estate bears to the total fair market value of all property received by all persons interested in the estate. If any of my property does not come into the possession of the personal representative, the personal representative is entitled, and has the duty, to recover from any persons possessing such property the proportionate amount of tax that is attributable to the assets possessed by that person. If the personal representative cannot collect from such person the amount of tax apportioned to such assets, then the amount not recoverable shall be prorated among the remaining estate assets. Any charge for taxes against my estate shall first be made against the estate’s principal and not the estate’s income. Note that, depending on size of estate, the testator may wish to carve out from the estate any property qualifying for the marital deduction, so that all taxes are allocated among the remaining non-MD property. 4. Protecting Beneficiaries from Themselves, Their Creditors, Ex-Spouses, Etc. This is particularly important if minor children are involved. Suggested clauses: Protection Against Dissipation of Trust. Under no circumstances shall any Beneficiary of this Trust, other than a Grantor, who is addicted to gambling, alcohol, drugs or other chemical dependencies receive any distributions of principal or income from this Trust. If Trustee suspects that any beneficiary has any addiction to alcohol, drugs or other chemical dependency, Trustee shall require periodic tests, no more frequently than monthly, of the beneficiary to insure that the beneficiary is not taking these substances. Trustee shall, upon discovering that these substances are being taken, require periodic checks of the beneficiary for a period of one year before any further distributions are made to that beneficiary. Trustee may require at the time the principal distributions are due to any beneficiary that beneficiary take a test at an accredited laboratory selected by Trustee as a prerequisite for receiving a principal distribution. 1. Direct Payment of Benefits. Upon discovery of any addiction or dependency, the Trustee may make payments to hospitals, doctors, or other persons or organizations treating or assisting the beneficiary to recover from the addiction or dependency. 2. Purpose of Restrictions. The purpose of this provision is to dissuade any Beneficiary of this Trust from gambling or using harmful substances which are addictive, to assist the beneficiary in recovery from any such addiction or dependency and to prevent the Trust estate, as much as possible, from ever being used to support an addiction or dependency that is harmful to the Beneficiary. Protection Against Creditors. If, in the opinion of the Trustee, any beneficiary is experiencing financial difficulties due to an inability or unwillingness to properly manage their financial affairs, the Trustee is authorized to withhold any distribution to said beneficiary and to hold any such proposed distribution in further trust until the beneficiary is, in the opinion of the Trustee, of sufficient maturity and ability to properly manage his or her financial affairs. This authority shall be administered in a manner consistent with paragraph B of Article VI entitled "Spendthrift Provision." Evidence of such inability or unwillingness shall include, but is not limited to, the filing of any bankruptcy petition, the filing of a levy, lien, foreclosure, or garnishment proceeding by any creditor against any property interest or the beneficiary, or, in the opinion of the Trustee, any seriously adverse information as contained in any credit rating report issued by a nationally recognized credit rating service. Trustee is authorized to withhold any distributions if any beneficiary will not consent to the release of such credit rating information to the Trustee. If a beneficiary is also the Trustee, the Trust Protector is authorized in a manner consistent with Article X to replace a Trustee if, in the opinion of the Trust Protector, the creditor protection may be threatened or diminished due to the Trustee having a beneficial interest in the Trust Spendthrift Provision. The interest of a beneficiary in the income or principal of the Trust hereunder shall be free from the control or interference of any creditor of the beneficiary or of the spouse of the beneficiary and shall not be subject to attachment, execution or other process of law or susceptible to anticipation, alienation or assignment, whether voluntarily or involuntarily encumbered, except in those cases where Trustee, in Trustee’s sole discretion, approves the credit extended and the assignment of the beneficiary’s interest hereunder as collateral therefor. In exercising such discretion, Trustee shall ascertain whether or not it would be in the best interest of the beneficiary that credit be accepted and collateral given. This provision includes obligations to pay alimony or support by any beneficiary or spouse of a married beneficiary. Nothing contained in this Paragraph shall be construed as restricting in any way the exercise of any powers or discretion granted hereunder. In addition, if the Trustee, in his sole discretion and for any reasonable cause, believes that any beneficiary, who is otherwise entitled to receive a distribution from this Trust, is unable or unwilling to manage his or her finances in what the Trustee deems to be a wise, mature, and reasonable manner, may, on that basis alone, withhold such distribution from the beneficiary and may continue to hold the amount of the proposed distribution in further trust for the beneficiary until the Trustee, in his sole discretion, believes that the beneficiary is adequately able to manage his or her finances in a wise, mature, and reasonable manner. The beneficiary’s inability or unwillingness to manage his or her property in a wise, mature, and reasonable manner does not have to constitute or equate to either that of an incapacitated person, as defined in ARS 14-5101, or to those actions authorizing protective proceedings as provided for in ARS 14-5401. In other words, the beneficiary’s conduct can be less troublesome than that requiring guardianship or conservatorship.
This has always been a big selling point for me. Clients who are parents will always be willing to pay more for a will with a testamentary trust. Not only does this prevent mandatory distributions when the beneficiaries reach age 18, but with proper spendthrift language, it can become a "Symington" trust that will provide creditor protection. See attached forms for sample trust. 6. Nomination of Guardians and Conservators. Anyone nominated by testator to serve as a G/C has priority for appointment. ARS 14-5311(b)(2). Testator may also want to indicate persons who are NOT to be appointed. Suggested clause: Guardianship and Conservatorship of Testator. In the event that I should become incapacitated or in need of a conservator, I appoint GR-1 as my legal guardian and/or conservator. If GR-1 shall fail or cease to act as legal guardian and/or conservator for any reason, I appoint GR-2 substitute or successor legal guardians 7. Nomination of Guardian and Conservator for Minor Children. Anyone nominated by testator to serve as a G/C for minor children has highest priority for appointment. ARS 14-5202. Testator may also want to indicate persons who are NOT to be appointed. Suggested clause: Guardianship and Conservatorship of Minor Children. In the event of the deaths of both myself and my spouse, N-2, I appoint GR-1 as legal guardian and/or conservator of my minor children. If GR-1 shall fail or cease to act as legal guardian and/or conservator for any reason, I appoint GR-2 substitute or successor legal guardians 8. Trust Protector A growing trend in the profession. Especially important to allow for post-mortem flexibility when tax laws or other laws change. Particularly important with the impact that the $1M estate tax exemption will have on funding the AB split – and the credit shelter trust may not even be needed.Suggested clauses: TRUST PROTECTOR A. Reasons for Having a Protector. A Trust Protector is necessary to: 1. Check and Balance. Serve as a check and balance within the Trust to ward off damaging conduct by any Trustee before it intensifies and creates costly legal proceedings for the Trust and the beneficiaries; 2. Changing Laws. Handle necessary adjustments from changing laws and changing conditions before the Trust is harmed; and, 3. Emergencies. Handle extreme emergencies requiring rapid action to change the situs of the Trust and remove the then Trustees. 4. Thomas J. Murphy, the attorney who drafted this Trust, shall be the Trust Protector. B. Review of Trust, Trustee and Advisors. The Protector may review the accountings and investments of this Trust and the acts of all Trustees and Advisors to the Trust annually and at such other times as determined in Protector’s sole discretion. C. Power to Immediately Remove Trustee and Advisors. After the death or disability of Grantors, the Protector shall have the authority at any time to remove the Trustee (except Grantor/Trustee, if any), any Successor Trustee or any advisor for any reason which appears in the best interest of the beneficiaries of this Trust. The purpose of this provision is to insure that there is a legal analysis of the Trust and the administration of the Trust to prevent any problems which may adversely affect the benefits received by or accruing to the beneficiaries. Should the Protector make a determination that the Trustee or advisor be removed, such a determination shall be in writing mailed to the Trustee or advisor; and upon receipt of such communication, Trustee or advisor shall prepare a final accounting, and the Successor Trustee or alternative advisor (if any) as designated in Article X of this Trust shall then qualify to serve as Trustee or advisor. The decision of the Protector to remove the Trustee shall be final and not appealable, subject to Paragraph F (General Limitation of Powers of Protector) of this Article, it being the intent of Grantor that any doubts will be resolved in favor of removing and changing the Trustee so as to maximize the quality of care of the Trust estate administered by Trustee. D. Removal, Revision or Addition of Provisions of Trust Under Limited Conditions. The Protector shall have the right and power, subject to the conditions of Paragraph D.3 (Conditions for Altering Trust) of this Article, at any time, to delete, alter, amend, change, add to, and subtract from all or any part of the various paragraphs and provisions of the Trust. 1. Purpose for Protector’s Power to Alter Trust. The purpose of granting Protector the power to alter the Trust is to avoid harm to Grantors and the Trust beneficiaries when later enacted laws, interpretations of laws, or situations cause the language of the various paragraphs and/or provisions of the Trust to frustrate the purposes of the Trust or the intended tax effect of this Trust. This power is granted to the Protector because all parties to the Trust realize that the world, the family, the law, the economic climate, and other conditions are changing rapidly. Mere deletion of a Trust provision may not be sufficient to remedy a tax problem or a problem which frustrates the purposes of the Trust. Also, extreme hardship or extremely altered factual conditions may come to pass which may not have been previously visualized by the Grantor. 2. Method of Altering Trust. The deletion of a paragraph or provision by the Protector may be accomplished by (a) striking out the objectionable paragraph or provision and initialing before and after the deletion and placing in close juxtaposition the date the deletion was intended to take effect; (b) sending a photocopy of the page(s) where items have thus been deleted to Trustee, Grantor and each beneficiary; and (c) sending with the page(s) containing the deletion a written opinion as to the factual or legal reasons for the deletion. 3. Conditions for Altering Trust. Before a change or addition can be made to the Trust, the Protector must: a. Give Written Reasons. Write the reasons for each proposed alteration, addition, or subtraction, as well as the proposed modifications, and send copies to Trustee, Grantor, and each beneficiary at least two weeks before the change or addition is to become effective. The Protector shall request from each of them in writing any objections or suggestions they may have and that they mail or deliver those written objections or suggestions to the Protector before the intended effective date. b. Obtain Written Approval. Obtain written approval from each of the following persons: (1) Grantor, if living, (2) the Trustee, (3) a disinterested attorney selected by the Trustee, and (4) a disinterested attorney selected by a majority of the adult beneficiaries and the legal guardians of the minor beneficiaries. The Trustee and beneficiaries may waive their right to a written approval by a disinterested attorney only upon unanimous consent, in writing, of all Trustees and adult beneficiaries and the legal guardians of the minor beneficiaries. E. Right to Gather Information. The Protector shall have the authority of a Special Trustee to communicate with and obtain documents and information with respect to the Trust and its assets from the Internal Revenue Service of the United States, any governmental agency, insurance company or any other person or organization. The purpose of this power is to permit the Protector to directly have the information necessary to make decisions required of the Protector under this Trust. The Protector shall share the information and documents thus obtained with Grantor, if living, and with the Trustees within a reasonable time after obtaining the information or documents. F. General Limitation of Powers of Protector. The exercise of any discretionary power granted to Protector is subject to prior written approval of any one of the following: 1. Grantors. Grantors, if living, and if both deceased, one of the Trustees, except as otherwise specifically prohibited by this Trust; 2. Adult Beneficiaries. A simple majority of adult income beneficiaries then entitled to benefits under this Trust; and, 3. Legal Guardians. If there are no adult income beneficiaries, a simple majority of the legally appointed guardians of the beneficiaries then entitled to benefits under this Trust. G. Special Limitations for Removal of Trustee. If the Protector seeks to remove one of the Trustees, then consent is not needed from the Trustee being removed to exercise the Protector’s power. If there is more than one Trustee or there are Successor Trustees provided for in the Trust Agreement, consent can come from the Trustee not sought to be removed or the Successor Trustee, in order of priority. H. Resignation of Protector. The Protector may be removed and replaced by (1) the unanimous consent of all of the then living lifetime beneficiaries or all of the then living adult income beneficiaries, or (2) all of the Trustees. J. Reports to Protector. Any person concerned with the Trust who has knowledge of any wrongdoing, mismanagement, or other problems shall report this to Grantor, the Trustee, and the Protector, unless, because of the involvement of the Trustee, it will serve no useful purpose to notify the Trustee. K. Compensation to Protector. Protector shall be entitled to reasonable compensation for his services rendered, which shall be payable from the Trust. 9. Omnibus Assignments. Used as equivalent of pour-over will where decedent has property outside of trust. Avoids probate that may be necessitated by pour-over will. 10. Beneficiary deeds Another great tool that will apply to all home-owning clients seeking to avoid probate. See my recent article in the June 2002 edition of Arizona Attorney that provides some drafting tips. 11. After-death instructions Does the client desire to be cremated or buried? Where will the burial be? Who should be notified? What kind of marker and epitaph? Does the estate pay for travel plans for family and friends to attend? 12. Mini-biography for death certificate. Provide information for the following: Armed forces veteran Date and location of birth Social security number Occupation and in what type of business or industry Approximate date that residence in Arizona began Highest completed grade in school Parents' names
State how shipping costs are to be handled and whether the PR (or whoever is acting on behalf of the decedent) is authorized to pay for travel and lodging for family members and friends who are out-of-town and attending the funeral. |