A will is the legal document that specifies how a person wants to dispose of the real and personal property owned in his own name at the time of his death. Most mentally competent adults have the legal capacity to draw a will. But few persons are knowledgeable enough to do so properly. Only an attorney should draft a will and even most attorneys should not attempt to draw their own.
See our infographic: Death by the numbers
Despite this, every member of the estate planning team, including the financial planner, should know how to review a will.
First, it is necessary to coordinate the will properly with other dispositive documents such as employee benefit plans. For example, if the will is not synchronized with an executive's pension, group and personal life insurance, and 401(k) or other retirement plan, there is no way to minimize overall death taxes and provide for a smooth and efficient estate administration. Also, if the will establishes trusts for minor children, the beneficiary designation of any other dispositive document must properly direct the assets to that trust.
Second, it is impossible to know if there will be appropriate liquidity to pay taxes and other estate expenses unless the will and its various dispositive schemes are examined.
Third, wills quickly become outdated and tax laws change rapidly. For instance, a marital deduction provision in a will drafted before September 13, 1981, may not qualify for the unlimited marital deduction; TRA '97 increased the unified credit in a series of steps and introduced a family-owned business exclusion; EGTRRA 2001 introduced a slow but steady increase in the unified credit, a gradual reduction in the top estate tax rates, and a repeal of the estate tax for one year in 2010, TRA 2010 lowered rates, increased the exclusion, unified the gift and estate tax systems, and introduced "portability "of the exemption between spouses. And starting in 2013, much of what occurred in 2010 was made permanent – and still more changed. The circumstances, needs, and desires of the client and his or her or their beneficiaries are always in flux. The attorney who drafted the will may have died and it may have been many years since the will was revised or reviewed by either the client or attorney. Since wills are generally drafted to address the conditions which exist at the time of drafting, it is essential to review the will at least every two or three years and after every major tax law change or major events in the client's life to make sure it is consistent with conditions as times change.
Fourth, state laws can change with respect to the operation of estates and trusts. For example, many states have adopted all or part of the Uniform Principal and Income Act (UPIA) and the Uniform Trust Code (UTC). Both of these laws change how estates and trusts are to be administered. It is important to keep your documents up to date to address both tax and non-tax changes to the law.
Every professional in the estate planning team must therefore be able to examine a will and spot – in general terms at least – what's wrong.
"What's wrong" with a given will is more often a question of what has been omitted or what has changed or what are the present objectives of the client than what has been improperly drafted. "What's wrong" is even more often the failure of the draftsman to match the facts of the case or the circumstances or desires of the parties with the provisions in the documents. "What's wrong" may be something the accountant, for instance, knows that no other professional knows. "What's wrong" may be that the will has not been updated for years and no longer addresses the current circumstances or client goals or latest tax law. "What's wrong" may be that a will alone – without a trust or the use of other tools or techniques – is inadequate or does not maximize the possibility to accomplish the client's objectives with greater certainty and lesser cost. "What's wrong" may be even be an inadequacy of cash to pay taxes or to maintain the client's survivors' lifestyle or achieve charitable objectives.
The following is a (by no means complete) checklist designed to give each member of the estate planning team the tools needed to examine a will.
1. Introductory clause
Start with the introductory (exordium) clause, which should be the first paragraph in the will. The purpose of this preamble is to
(1) identify the testator, the person disposing of property at death;
(2) establish domicile, the county that will have legal jurisdiction for purposes of determining the validity of the will and interpreting will provisions, for purposes of state inheritance taxation (technically, what is said in a will about the testator's domicile is not dispositive but it is evidence which will usually be considered even if subordinated to proof of facts to the contrary);
(3) declare that the document in question is intended to dispose of the testator's property at death and no matter how many wills have been written in the past, this is meant to be the last will; and
(4) revoke all prior wills. This is designed to nullify old and forgotten wills – and "codicils" (legally effective modifications of existing wills).
An example of this introductory clause is:
I, Morey S. Rosenbloom, a resident of and domiciled in the city of Bryn Mawr in Montgomery County, Pennsylvania, declare this to be my last will. I revoke all wills and codicils made prior to this will.
Planners should check:
(1) Is the spelling of the client's name correct? Has the client's full name been used?
(2) Is the client A/K/A (also known as), i.e., is there some other name by which the client is known and should that name be listed?
(3) Is the domicile correct? For tax or other planning purposes, would it make sense to begin to document a different domicile? Will the will meet all the statutory requirements of the stated domicile? If the client spends a great deal of time in more than one residence, could the address mentioned in the will trigger a "double domicile" problem (e.g., where more than one state claims the decedent was a domiciliary of the state and therefore has the right to impose a death tax)?
(4) Is there a reason prior wills and codicils should not be revoked? Instead of a new will, should the present document be a codicil making a small change but otherwise ratifying an existing will? For instance, if there is a potential for an attack on this will on the grounds of mental incompetency, fraud, or undue influence, a prior will providing a similar disposition will help prove the mental capacity of the testator and may discourage would-be contestants from attacking the current will. Conversely, if a beneficiary has been deleted, a new will should be drawn rather than a codicil to avoid the mention of the eliminated beneficiary.
After the introductory clause, the will can take either of two directions. It can (1) describe the steps that take place in administering the testator's estate (such as payment of debts and taxes and then payment of legacies) or it can (2) dispose of legacies first and describe obligations later. We will take the former approach in formulating this checklist.
2. Debts clause
The next clause usually pertains to the payment of debts, expenses, and costs. The purposes of this clause are:
(1) To state the source from which each debt will be paid. (This is an extremely important point because of the death tax implications. For instance, if a surviving spouse rather than some other beneficiary must pay debts, to that extent the marital deduction will be decreased and taxes may be increased. Furthermore, if the burden falls on the wrong person(s), the testator's goals may not be met.)
(2) To establish as debts items that might not otherwise be considered the testator's obligations.
An example of the payment of debts clause is:
I direct all of my lawfully enforceable debts (including any expenses of my last illness) and my funeral expenses be paid.
It is important to reference "lawfully enforceable debts"; because some debts may not be enforceable. For example, some debts may barred by the statute of limitations. If you direct all debts be paid, your executor may have to pay debts that they would not otherwise legally have to pay.
Planners should check:
(1) Does the testator have any rights to property held in the trust of another person (a so-called "power of appointment") and, if so, what effect does the debts clause have on that property? Does it expose that property to the claims of creditors? Also, do those assets get "blended" with the probate estate and became part of the probate estate or do the trust assets pass directly from the other trust to the beneficiaries of that trust? Whether or not the assets passing from that other trust become part of the probate estate can be important if there are creditors of the testator. These creditors look to the assets within the probate estate to satisfy their claims.
(2) Will the beneficiaries receive more or less than the client intended when the will was drawn because of the operation of this provision? Has the size of the debt changed since the will was drawn? What will be the federal and state death tax impact of the clause?
(3) What is the effect of the Equal Rights Amendment in the state of domicile? In some states, the will of a married woman should contain a direction to pay debts and taxes. Otherwise, the burden of her funeral and medical expenses will be placed on her surviving husband – thus barring a deduction for payment of those expenses by her estate.
(4) Did the will provide detailed funeral arrangements? Most authorities feel this is inadvisable since the will may not be found or may not be accessible in sufficient time after the testator's death. Should such provisions be placed in a "Letter of Instructions," an informal and nonlegal list of requests, suggestions, and recommendations that should not be placed in the will? Some states have separate directives with burial instructions.
(5) Does the client intend that "payment of debts" include the mortgage on property left to a specific individual? In some states, absent an express direction to the contrary, when specific property is left to an individual (a "specific bequest"), any debt on that property will not be paid off. In other states, such a clause will require the executor to satisfy the mortgage. Does the named beneficiary of a life insurance policy that has been pledged as the collateral for a loan have the right to have the loan paid off because of the "pay my [just] debts" clause? The planner must check state law. In at least one state, the answer depends on who the lender is. The result, absent specific direction to the contrary, is one way if the lender is the insurance company (the beneficiary takes only the net proceeds) and another (the beneficiary is entitled to have the estate pay off the debt out of other estate assets) if the creditor is an independent lending institution.
3. Tax clause
The clause pertaining to the payment of death taxes can either be stated next or appear after the provisions disposing of property.
The purpose of the tax clause is to establish the source for the payment of the federal estate tax, the state inheritance and estate tax, and any federal or state generation-skipping transfer tax.
This is an example of a tax clause:
I direct that all inheritance, estate, transfer, succession, legacy and other death taxes upon property required to be included in my taxable estate whether or not passing under this Will [except (1) transfer taxes levied pursuant to the provisions of Chapter 13 of the Internal Revenue Code of 1986, relating to "generation-skipping transfers," or any similar state law, and (2) taxes on property held in trust under the Will (or any revocable trust) of my spouse], and any interest and penalties thereon, shall be charged against and paid from my residuary estate passing under ArticleFOURTH of Part I of this my Will.
However, note that this tax clause charges the taxes on all assets which are "included in my taxable estate whether or not passing under this Will" to the residuary estate. This means that if there are joint assets, life insurance, retirement assets – or any asset that passes through a beneficiary designation; the taxes on such assets are paid from the residuary estate. If the residuary beneficiaries are not the same as the recipient of these other assets, then some individuals are paying taxes on assets which they are not receiving. While there are many situations where this may be appropriate, it is important to consider the ramifications of this approach.
Planners should check:
(1) State "apportionment" statutes. If there is no tax clause in the will or if it does not adequately address the payment of a particular death tax, state law will allocate the burden of taxes among the beneficiaries. Many states require beneficiaries to pay a share of estate taxes unless the will provides otherwise. The result is often an inappropriate or unintended reduction of the shares of certain beneficiaries or adverse tax consequences. (For example, there may be a spiraling reduction of the estate tax marital deduction. The deduction is allowed only for the net amount passing to the surviving spouse. If that amount is reduced by an estate tax burden, the tax increases – further reducing the amount passing to the spouse, etc.) An "anti-apportionment" tax clause may be the solution. For instance, suppose you wanted a child to receive $100,000 of your client's $2,000,000 estate free and clear. Without special provision, that child would be forced to pay his share of taxes, or 1/20 of the total federal and state death taxes. With a special tax clause, the child will receive the entire $100,000.
(2) Does the client expect or want property passing outside the probate estate to pay its share of tax if the disposition of that non-probate asset generates tax? For instance, assume $1,000,000 of pension proceeds (or life insurance) is payable to the client's two oldest children and $1,000,000 of cash is payable to the client's two youngest children. Who is to pay the tax on the $2,000,000? What if the $1,000,000 of pension proceeds (or life insurance) is state inheritance tax exempt, but the cash is not? Unless the will provides to the contrary, estate taxes must be paid by recipients of property passing outside the will. The will should specify who pays taxes on both probate and nonprobate property.
(3) Assume a sizable amount of property will pass through a revocable living trust. Is the tax clause in that instrument coordinated with the tax clause in the will, or are they incompatible? What if assets under the will are to "pour over" into a previously funded trust which itself will generate significant estate taxes. Is there (should there be) a will provision calling upon the trust to help the estate pay taxes? Does the trust have a provision recognizing and empowering a "call" on its assets to pay the probate estate's taxes?
(4) Who is to pay the tax on a generation-skipping transfer? Absent a contrary direction, the taxes will probably be payable from the assets of the fund subject to the tax. Some draftsmen specifically provide that such taxes are not to be imposed on the "skip person's" estate.
(5) Assume the facts indicate that very large taxable gifts have been made by the client. The taxable portion of these gifts – to the extent not included in the client's gross estate – will be considered "adjusted taxable gifts." They will increase the rate of federal estate tax payable on the taxable estate remaining. Will an unexpectedly high burden be placed on the assets remaining because of these prior gifts and should the tax clause take such gifts into account in apportioning the tax burden?
(6) Should certain beneficiaries be insulated from tax for either tax reasons or to accomplish the dispositive goals of the client or better meet the needs of the beneficiaries? For example, should a child to whom property has been given be exempted by the will from paying the estate tax on that property?
4. Tangible personal property clause
A clause pertaining to the disposition of tangible personal property is often next. The purposes of this clause are:
(1) to provide for who will receive personal property, and the terms under which they will receive it; and
(2) to make special dispositions among the persons and the organizations of the testator's choice.
An example of the tangible personal property dispositive clause is:
I give to my daughter, Eva Grieg, all of my clothing, household furnishings, jewelry, automobiles, books, pictures, and all other articles of tangible personal property owned by me at the date of my death. If my daughter, Eva Grieg, does not survive me, I give the property mentioned above in equal shares to my grandchildren, Gretta and Gail Grieg or the survivor who is alive at the date of my death.
or
I give the Philadelphia Museum of Art my painting of "Helga" by Andrew Wyeth and my Douglas Mellor "Garvey with Parachute" photograph.
Planners should check:
(1) Does (or should) the client make specific bequests of all "intimate" items such as a watch or ring? Absent such provisions, if personal property has been left to several individuals, the result is often needless expense in determining who gets what or reducing the estate to cash (not to mention the potential for bitter intrafamily fights). If specific bequests have been made, has each item been described in enough detail so that there will be no confusion as to which diamond ring the testator meant? (Use the same description as is found in the insurance policy covering the loss or theft of the item). In some cases it may make sense to take pictures of the personal property and indicate on the back of the picture how the items are to be disposed.
(2) Has provision been made in case the item specifically left to a beneficiary is not owned by the decedent at death? For instance, what if one ring is sold and the proceeds are used to purchase a second. Does the named beneficiary receive the second ring?
(3) If the item specifically bequeathed has been lost, stolen, etc. and the loss has been covered by insurance, would the client want the named beneficiary to receive the insurance? In many states, the bequest of an item of personal property does not – absent specific direction to the contrary – also pass the insurance covering the item.
(4) Does the client intend to pass – under the category of personal property – cash in a safe deposit box, travelers' checks, and cash found in his home or on his person? Does the client know that cash on deposit is typically not considered tangible personal property?
(5) If the client has property in many different places, consider allowing the executor – at the expense of the estate – to take possession of the property "as and where is" (a provision which will permit the beneficiary to receive the property free of delivery costs, and protect the fiduciary and beneficiaries during administration from the risk that specific assets will be lost).
(6) The phrase "personal effects" may not encompass items of household use or even a car. Consider specific mention of items of tangible personal property.
(7) Is there a "catchall" phrase that passes the residue of tangible personal property? The phrase, "all other tangible personal property" should dispose of any residual property.
(8) Should the will confirm that certain property such as household furnishings, silverware, etc. belongs to someone else?
(9) Does this clause dispose of property by referring to an instrument outside the will? This "incorporation by reference" is not recommended since it often leads to litigation.
(10) The use of the term "contents" should be avoided. Personal property should not be described by its location.
General checkup of legacies:
(1) Has property been left outright to a minor who is legally incapable of handling it, or to a person under a physical, mental, or emotional handicap who does not have the physical or intellectual capacity? This also applies to naming such individuals as beneficiaries of non-probate assets. For example, the financial institutions may require a court appointed guardian before granting access to the assets passing to a minor beneficiary.
(2) Are all beneficiaries named alive? Are there "backup" beneficiaries (at least two) for each beneficiary? Are they the beneficiaries the client currently desires?
(3) Are any of the gifts conditioned on events or circumstances that are impossible, "against public policy," or in violation of the Constitution? For example, a bequest would be invalidated by the courts if it were made on the condition that the recipient first divorce their spouse.
(4) Are there gifts to "my issue" (which may unintentionally disinherit an adopted person; while states differ, in some states adopted children are considered issue, and in some states they are not). Also, in the case of same sex couples, the children may not be "issue" of both partners.
(5) Do gifts to charities meet state law requirements? Has the charity's full legal (corporate) name and address been stated? (The popular name is often different from the full legal name). Have you checked the IRS's "Cumulative List of Organizations," or obtained assurances from the charity itself, to make sure the gift to the charity will qualify for a tax deduction? Has the client named a backup charity? Check to be sure the will specifies that taxes are to be paid from the portion of the residue not passing to charity. Otherwise, what should be a tax-free bequest must bear its portion of the total taxes. That reduces the charity's share and therefore increases taxes. This in turn creates a new cycle of problems.
(6) If someone is intentionally omitted, have you checked state law to see if such an omission is permissible? Are there defamatory statements in the will concerning an heir? (At the probate of the will, such statements may become libelous and expose the client's estate to an action for damages.)
(7) Does the will make so many specific bequests of cash that the residuary estate doesn't have enough left to pay estate taxes? Keep in mind that the IRS can attach the assets of any beneficiary for the unpaid estate tax. Check to be sure the executor will have a sufficient reserve of funds for paying estate tax and all the bequests to residuary beneficiaries.
(8) Note that a tangible personal property clause should nearly always be used where the residue of the estate will be paid to a trust. Few clients want trusts involved in handling personal effects such as jewelry, or household furniture, antiques, or cars.
5. Devises of real estate clause
The next clause pertains to "devises," testamentary grants of real property. The purposes of the devises clause are:
(1) to specify which real estate is to be disposed of under the will and to dispose of that real estate, and
(2) to handle the problems where the property has been sold or destroyed prior to the testator's death.
An example of a devise is:
I leave my residence located at 2 Red Cedar Rd, Amelia Island, Florida to my daughter, Lara Leimberg. If, at the time of my death, I am no longer using the property at 2 Red Cedar Rd, Amelia Island, Florida as my residence, then this devise is to be void and of no effect; however, if I own any other real estate which I am using as my residence at that time, then, in such an event, I devise such other real estate to my daughter, Lara Leimberg. If my daughter, Lara Leimberg, does not survive me, this devise shall lapse and such real estate shall become part of my residuary estate.
6. Specific bequests of intangibles and cash
After disposing of tangible personal property and real estate, the will may then cover specific gifts of intangibles (property where the item itself is evidence of value) such as gifts of cash or accounts receivable. An example of a gift of an intangible asset is:
I give 100 shares of Facebook stock to my niece, Danielle Green.
or
I give the sum of Five Thousand ($5,000) dollars to my sister, Sara Black, if she survives me.
Planners should check:
(1) Has provision been made in the event the primary beneficiary does not survive the decedent?
(2) Does the will spell out what gift, if any, is made if the decedent does not possess, at the time of death, the stock mentioned in the will? What if the stock had been sold but new stock was purchased with the proceeds? What if there was a stock split and only a specified number of shares were given?
7. Residuary clause
The next clause is called the "residuary clause." The purposes of the residuary clause are to:
(1) transfer all assets not disposed of up to this point,
(2) (in some cases) provide a mechanism for "pouring over" assets from the will to a previously established (inter vivos) trust (if a pour over is made, it is important to review the trust as carefully as the will itself), and
(3) provide for an alternative disposition in case the primary beneficiary has died or the trust to which probate assets (assets passing under a valid will or by intestacy) were to be poured over was for some reason invalid, previously revoked, or never came into existence.
An example of a residuary clause is:
All the rest, residue, and remainder of the property that I own at the date of my death, real and personal, tangible or intangible, regardless of where it is situated, I leave to my daughter, Larrissa Grieg. But if Larrissa Grieg does not survive me, then I leave the said property in equal shares to my grandchildren, Ronald Reimus and Reginald Reimus or to the survivor of them, per stirpes.
