Requirements for a Valid Will
Each state sets slightly different formal requirements for the creation of a legal will. In Minnesota, a person must be at least 18 years old in order to make a legal will. In addition, he or she must be of sound mind, which means that the individual has no mental disability that prevents him or her from understanding the full nature of the document he or she signs. In Minnesota, a will must be in writing and must be witnessed and signed by at least two other people. A handwritten will, often called a holographic will, is valid in Minnesota provided that it is witnessed and signed by two people. Individuals must sign their own wills, but if they are illiterate or otherwise incapacitated, they can direct another person, in the presence of witnesses, to sign for them. A will is valid until it is revoked or superseded by a new will. Individual provisions can be changed by a codicil, which is described in the section, Changing and Updating Wills.
It is not necessary to hire an attorney to create a will. A non-attorney can create a will, but he or she must pay close attention to the details outlined above. Smaller estates can be described simply, and making a will to disperse a smaller estate can be done by almost anyone. The simplest will in history ever to be declared valid by a court contained only three words: "All to wife." However, a lawyer's guidance is very helpful with complicated property holdings or an estate with many assets, especially if they are located in several different places. Small business owners need the advice of an experienced attorney to transfer their assets. In these cases, an attorney's help can ensure that the transfer of property described in the will is done in a way that minimizes the survivor's tax liability. In addition, a complicated estate may require documents other than a will, such as a trust agreement, to ensure that all of a person's wishes are carried out.
Personal Representative
A will typically appoints someone called a personal representative to carry out the specific wishes of the person who has died -- the decedent. The personal representative should be a trusted friend or family member who should be made fully aware of his or her duties before the decedent dies. A personal representative must do many things, including collecting and managing the decedent's assets, collecting any money owed at the time of death, selling any assets, if necessary, to pay estate taxes or expenses, and filing all required tax returns. Because a personal representative is allowed to charge a fee for doing this work, choosing a friend or family member who is also a beneficiary to fill this role may be a good choice, as he or she may not charge the full amount allowed by law. To ensure that one's estate has a personal representative chosen by the decedent, it is wise to name one or more contingent personal representatives who can take over the responsibilities of the primary personal representative if the primary personal representative is unable to assume the responsibilities of the position.
If a person does not name a personal representative in his or her will, state law establishes the order in which a probate court appoints relatives to act as personal representative. If none of these family members agree to be the personal representative, the probate division of the district court may appoint a professional administrator to do the job.
Appointing a Guardian for Children
A person with minor or dependent children can name in a will a guardian to care for those children should there be no surviving parent. If a person fails to name someone to assume the role of guardian, the probate court appoints someone. The person chosen by the court will usually be a close relative or friend, but it may not be the person the parent would have chosen. As with the selection of a personal representative, it is important that the potential guardian understands the provisions of the will and is willing to accept the responsibilities of being a guardian. Also, it is wise to name an alternate guardian should the primary guardian be unable to accept the responsibility. Of course, the selection of a guardian for children is likely to influence how the parent wants to distribute his or her property. Otherwise, a decedent's money might go to one person while his or her children go to another person. The parent may want to give property to someone only if the recipient accepts guardianship of a child. In this way, the guardian is given the financial resources to care for the child.
Planning for Incapacity
People drafting wills often use the opportunity to plan for the possibility of their own incapacity. By preparing a document called a durable power of attorney, they can give another person of their choosing full legal authority to act on their behalf should they become unable to handle their personal and financial affairs. Without a durable power of attorney, a person's family might need to go to court to have someone appointed to handle the person's legal affairs. If a power of attorney is made part of the will, it is essential that the will be made known to family members before the testator becomes incapacitated. If a will is kept secret, locked away in a safe deposit box until a person dies, it will be too late for the power of attorney provisions to be useful.
Some people also use a document called a durable power of attorney for health care to make health care decisions in advance should they subsequently become incapacitated.
Restrictions on Wills
In order to protect spouses and dependent children, some laws prevent a person from disinheriting a spouse or child. A married person cannot completely disinherit his or her spouse without the spouse's consent. Occasionally this happens through a prenuptial agreement, for example, in which a second spouse agrees that an entire estate will go to children from a first marriage. In the absence of a contrary agreement, a surviving spouse has the right of election, which allows him or her to take a portion of the spouse's estate. This is used when a spouse is unhappy with the provisions of a will. A person may legally disinherit a child by clearly specifying in a will that the child not receive any of the estate.
There are other limits to a will. Anything owned in joint tenancy with another person will go to the surviving joint tenant. Arrangements must be made to end the joint tenancy before death if one joint tenant does not want the other to inherit the jointly held property. Because there may be significant tax consequences in doing so, these changes should be made only after consulting an attorney. Other possessions are not considered part of the estate because they are already promised to someone else. For example, a testator cannot specify in a will that someone other than the beneficiary of a life insurance policy gets the benefits described in that policy. However, a person can designate his or her estate as the beneficiary of a life insurance policy. In this case, the money from the policy will be added to other estate assets and will be distributed according to the will. Similarly, the money from a retirement plan goes to the persons named on the plan, regardless of whether they are beneficiaries in a will. Laws designed to uphold public policy also limit what can be done with a person's assets after death. For example, conditions in a will encouraging someone to do something illegal or immoral in order to inherit money or property would not be enforced.
Changing and Updating Wills
The provisions of a will are valid until they are changed, revoked, destroyed, or invalidated by the writing of a new will. Changes or additions to a will can be included in a document called a codicil. Codicils must be written, signed, and witnessed in the same way as a will. Wills cannot be changed simply by crossing out existing language or writing in new provisions. In order to avoid making a new will or codicil each time a person's possessions change, a will can specify that personal property is to be distributed according to instructions outlined in a separate document. A person can then revise the separate document as often as necessary, without observing all of the formalities required to change the will itself.
If someone dies with a will that is not up-to-date, people may not be provided for adequately. For example, a person chosen to be a personal representative or guardian may have died or fallen out of favor with the author of the will, or a favorite charity may no longer be in existence. A significant amount of case law has dealt with how a probate court is to proceed with a will that has become unenforceable because of changed circumstances. These headaches can be avoided if a will is reviewed at least every two years and revised for major changes in tax laws or for personal events such as births, deaths, marriages, divorces, or significant changes in the size of the estate. It is also a good idea to review a will if its author moves to another state, because the new state of residency may have different inheritance and tax laws. In Minnesota, a divorce automatically revokes any distribution to the former spouse.
When a decedent leaves no will or other comparable estate planning tool, he or she is said to have died intestate. The division of the state district court system set up to handle wills and trusts is called the probate division. When a person dies intestate, the probate division steps in to divide the decedent's estate, according to a formula known as the state inheritance laws. Under the state inheritance laws, the probate division uses formulas set by the legislature to divide a deceased person's possessions among any surviving relatives.
A probate division applying the state inheritance laws first deducts from the estate funeral expenses, any unpaid medical bills, taxes, family allowance expenses, and any other debts owed. If the decedent has a surviving spouse and no children, the entire estate, after these deductions, goes to the spouse. If there are children, and the family home was not held in joint tenancy, the surviving spouse receives the right to the homestead for his or her life, known as a life estate, and a portion of the remaining estate. Surviving children receive whatever is left of the estate after the spouse's share is deducted, and they inherit the homestead when the surviving spouse dies. In the absence of a will, a surviving spouse with at least one child generally receives a life estate in the homestead, the first $70,000 of the estate, plus one-half of the amount remaining after the first $70,000 is deducted. The other one-half of the estate is divided equally among the decedent's children. If one of the decedent's children dies before the decedent, that child's share passes to his or her living descendants, if any. Anyone entitled to inherit a portion of an intestate decedent's estate is known as an heir.
One problem with relying on a probate division applying state inheritance laws to distribute one's estate is that it may not distribute the estate in the manner the decedent would have wanted. State inheritance laws only recognize relatives. The inheritance laws never permit the probate division to support a decedent's close friend, lover, or favorite charities. If no relatives are found, the estate goes to the state. Clearly, for most people writing a will or creating a trust is advisable.
Mechanics of a Trust
To create a trust, the owner of property (grantor) transfers the property to a person or institution (trustee) who holds legal title to the property and manages it for the benefit of a third party (beneficiary). The grantor can name himself or herself or another person as the trustee. A trust can be either a testamentary trust or a living trust. A testamentary trust transfers the property to the trust only after the death of the grantor. A living trust, sometimes called an inter vivos trust, is created during the life of the grantor and can be set up to continue after the grantor's death or to terminate and be distributed upon the grantor's death.
Unlike a will, which in some cases can be drafted without the help of an attorney, a person should never draft a trust without the aid of a lawyer. Many complex laws regulate trusts depending on the size and composition of the estate. Trusts must be carefully structured if they are to take advantage of beneficial tax treatment. An experienced attorney should always assist in drafting a trust so that it is valid, meets the needs of the estate, and does not conflict with any previously drafted will.
Advantages and Disadvantages of a Trust
Trusts have many advantages over wills. The advantages depend on whether a living trust or testamentary trust is chosen. All trusts have the advantage of allowing the grantor to determine who receives the benefit of the money, when they receive it, and what conditions must be met. If a spouse is unable or unwilling to manage assets, if children are minors or unable to handle money responsibly, or if a beneficiary is disabled, creating a trust can be a better way of passing on assets. Living and testamentary trusts are an especially popular way of providing for beneficiaries' future educational or medical costs.
Some advantages are particular to living trusts. First, a living trust can give its grantor substantial tax advantages. Second, possessions held in a living trust are not subject to estate administration by the probate division after the grantor dies. Survivors do not have to reveal the details of any possessions held in trust through the public filing process that takes place during probate. In addition, if the grantor owns real estate in another state, establishing a living trust for the title to that property may allow survivors to avoid probate in the other state. A living trust can free the grantor from the burden of overseeing his or her financial affairs because a trustee manages all the assets of a living trust. More importantly, a living trust allows a trustee to manage the trust funds in the event that its creator becomes incapacitated or mentally or physically unable to oversee his or her possessions. If a living trust contains all of a person's assets, then he or she may not need a will, and his or her survivors may be able to avoid probate. If only part of a person's possessions are held in living trust, then a will is necessary to distribute those items in the estate not placed into a trust. However, a pour-over provision in a will can place any possessions remaining upon death into a pre-existing living trust.
The primary disadvantage of a living trust is that it involves the loss of some flexibility and control over one's assets. Unlike wills, which become effective only at death, a living trust becomes effective immediately upon its creation. For the person who wants to retain unrestricted control over his or her estate, a will or a testamentary trust is a better estate planning tool because it can be changed at any time prior to death.
The primary advantage of a testamentary trust is that it allows the grantor to retain unrestricted control over his or her estate. A testamentary trust becomes effective only upon the death of its grantor. Like a will, a testamentary trust can be changed at any time prior to death. The primary disadvantage to testamentary trusts is that they do not take advantage of the beneficial tax treatment given to living trusts. Because a testamentary trust only takes effect when the grantor dies, the grantor cannot enjoy any tax advantage during his or her life. Also, most testamentary trusts must go through probate.
Revocable and Irrevocable Trusts
A living trust can be either revocable or irrevocable. As implied by their names, a revocable trust can be changed or revoked after its creation, while a person signing an irrevocable trust gives up the right to change or revoke the trust. Revocable trusts are quite often devised to supplement a will and/or to name someone to handle the grantor's affairs should the grantor become incapacitated. A trust usually must be made irrevocable if the grantor wants to avoid income or estate taxes. Tax authorities consider the grantor of a revocable trust to be the owner of the property because he or she still controls the property. For this reason, income from assets held in a revocable trust must be reported as income to the grantor for income tax purposes. At the death of the grantor, property in a revocable trust is included in the estate for calculating estate taxes.
Irrevocable trusts are often designed to be the beneficiary of a life insurance policy. Such a life insurance trust can also spell out how the policy's money is distributed to survivors. In addition, irrevocable trusts are often set up to manage money given to minors and to charities. Finally, an irrevocable trust can be used to transfer assets to another person in the event that the grantor requires expensive medical care. Although doing so may protect the grantor's family by ensuring that the cost of medical care does not wipe out the family fortune, it may also make the grantor ineligible to receive federal and state Medical Assistance. State law prohibits the beneficiary of a trust fund from receiving public assistance or public health care benefits. However, the 1993 Minnesota Legislature passed a law permitting disabled people to receive supplemental needs trusts without jeopardizing their public assistance status. These trusts must be designed to meet the special needs of disabled people that are not met by public assistance benefits; therefore, one should only create this kind of trust after consulting with an attorney.
Informal probate is designed for estates in which court supervision or adjudication is not required because the estate has no uncertainties, legal disputes, or complex administrative requirements. A personal representative can apply for informal probate and become personally responsible for probating the estate completely, correctly, in accordance with state statutes, and promptly. Most personal representatives engage an attorney to handle at least a portion of their duties even with informal probate.
When the probate division formally supervises distribution, its responsibilities may include:
Only an attorney experienced in estate planning for owners of closely held businesses can adequately advise on all aspects of treating closely held business assets. Before an attorney can prepare a will or trust, however, the person with an interest in a closely held business must consider his or her own need for income until death, the likelihood that someone in the family will want to continue playing an active role in the business, and the ability of a recipient to pay death taxes and administration costs if the business is going to continue after the owner's death.
Some common options chosen by small business owners include partner buyout agreements, gift-leaseback arrangements, life insurance policies, incorporation, or selling the business. In a partner buyout agreement, partners can agree that a surviving partner will buy the interest of a decedent at a price agreed upon in advance. Partner buyout agreements are common but they need to be updated periodically as the value of the business changes. Under a gift-leaseback arrangement, substantial assets are put in trust for the benefit of one or more beneficiaries then leased back to the business. The primary benefit of a gift-leaseback arrangement is that the beneficiary receives financial support but business operations cannot be disrupted. Life insurance policies can provide a recipient with sufficient cash to pay taxes and administration costs without having to sell the business. Incorporating often makes it easier to value the business.
Selling the business may seem drastic, but doing so can mean the recipient receives more money. Many small business owners feel strong emotional attachment to businesses they have grown from scratch. Often emotional attachments lead an owner to refuse to sell a business and the family has to sell it later in order to pay off bills or because no one is capable of managing the business. Accepting the need to sell a business while its owner is still alive can be wise because the owner has time to find a suitable buyer. In addition the business is likely to fetch a higher price because its current owners can offer to oversee the transition to new ownership.