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22.4: Wills and Trusts

  • Page ID
    49174
  • Both real and personal property may be transferred to another owner through wills and trusts. Although most people think of wills and trusts as a tool for conveying property owned by individuals, businesses property often needs to be transferred when the business owner dies. This is especially true for sole proprietorships and partnerships.

    A will is a document by which an individual directs his or her estate to be distributed upon death. Wills must be in writing and signed by the individual(s) making them. Although state laws regarding wills vary slightly, most states require:

    Requirement Description
    Legal age
    • The individual must be 18 (16 in Louisiana, 14 in Georgia, under 18 in the military)
    Testamentary intent
    • Must make clear that document is a will through words such as “last will and testament”
    Testamentary capacity
    • The individual must be “of sound mind” and understand that he or she is creating a will, what property is being transferred & to whom it is being given
    Signature
    • The individual must sign the document
    Witnesses
    • There must be 2 adult witnesses to the individual signing the will;
    • Most states do not require the will to be notarized but this step is recognized as a best legal practice

    A trust is a property interest held by one person or entity at the request of another for the benefit of a third party. For a trust to be valid, it must involve specific property, reflect the person’s or entity’s intent, and be created for a lawful purpose. Trusts are very popular for leaving property to benefit children who are under 18 years old, elderly, and people with disabilities.

    When planning how to distribute property upon death, it is important to understand the difference between probate and non-probate assets. Probate is the process through which a court determines how to distribute property after someone dies. Some assets are distributed to heirs by the court (probate assets) and some assets bypass the court process and go directly to beneficiaries (non-probate assets). Probate assets generally are subject to inheritance taxes and distribution can be delayed until the court orders the distribution of the assets. Because of these drawbacks, many individuals prefer non-probate assets.

    Probate Assets Non-Probate Assets
    • Real property titled solely in the decedent’s name or held in tenancy in common
    • Personal property, such as jewelry, furniture & vehicles
    • Bank accounts solely in the decedent’s name
    • Interest in a partnership, corporation or limited liability company
    • Life insurance policies or brokerage accounts identifying the decedent or his or her estate as a beneficiary
    • Real property held in joint tenancy or tenancy by the entirety
    • Bank or brokerage accounts held in joint tenancy or with payable on death (POD) or transfer on death (TOD) beneficiaries
    • Real property, personal property, and money held in a trust
    • Life insurance or brokerage accounts identifying someone other than the decedent as a beneficiary
    • Retirement accounts

    Death of a property owner impacts the ability to transfer property. The ownership interest dictates how the property may be transferred.

    Type of Ownership Death of Owner Transfer Where Available
    Tenancy in Common Owner’s interest passes to heirs Owner may transfer interest without agreement of co-owners All states
    Joint Tenancy Owner’s interest passes to the remaining joint tenants as non-probate asset Owner may not transfer interest without agreement of co-owners All states
    Tenancy by Entirety Owner’s interest passes to the surviving spouse Owner may not transfer interest without agreement of spouse Approximately half of the states
    Community Property Half of owner’s interest passes to the surviving spouse & other half passes to other heirs Owner may not transfer interest without agreement of spouse Only 9 states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas & Washington

    If someone dies without a will or trust, the probate court will determine:

    1. The nature and value of the decedent’s estate;
    2. The nature and value of any outstanding debts and tax obligations;
    3. Whether the decedent has any heirs;
    4. The identity of the heirs and their relationship to the decedent; and
    5. What, if anything, the heirs are entitled to receive from the decedent’s estate.

    The essential role of the probate court is to ensure that the deceased person’s creditors are paid and that any remaining assets are distributed to the proper beneficiaries. However, this process takes time and costs money from the deceased person’s estate. And there is no guarantee that the deceased person intended his or her property to be distributed based on the state’s rules on who qualifies as an heir and what they are entitled to receive. Business assets owned by the deceased person may complicate the probate process even more.

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