INTRODUCTION TO ESTATE PLANNING (PART 3)

We are continuing the revisiting of an article series written by Willaim R. Remery, an Elder Law Attorney. If you enjoyed May’s Intro to Estate Planning Part II, enjoy this third article in that series.   

As promised in “Part 2” of this series on estate planning, this article will deal with wills, including the technical requirements for making a valid will and an analysis of the strengths and weaknesses of wills as part of an overall estate plan.  

There are three kinds of wills which are recognized in California. The most common is the “witnessed” will. A witnessed will is typically prepared by an attorney or filled in on a preprinted form from a stationery store. It is then signed by the person making the will (known as the “testator”) and signed by at least two witnesses. Where a testator is not physically able to sign his or her own name, the testator can use a mark or simply declare that the document is the testator’s will and direct someone else to sign it for the testator.  

The testator and both witnesses must all be present at the same time and see each other sign the document. The witnesses must be “disinterested” meaning that they do not take anything under the will. If the will contains a statement by the witnesses under penalty of perjury setting forth the circumstances under which the will was executed, then the witnessed will is considered “self proving” and can be admitted to probate easily, absent a will contest. 

The second type of will recognized in California is called a “holograph.” A holographic will is not witnessed. In order to be valid, all of the important provisions in the holograph, such as how the estate is to be divided, must be in the testator’s own handwriting and must be dated and signed by the testator. Preprinted language will be ignored and, if that language significantly affects the dispositive terms of the will, the document will not qualify as a holograph and will not be admitted to probate absent the two required witnesses. It must also be clear from the document itself that it was intended to be a will and not merely a note as to an intention to make a will in the future or a preliminary draft of a will. A holographic will can never be “self proving.” Before it can be admitted to probate the proponent of a holographic will must file a declaration authenticating the testator’s handwriting.  

The third type of will which is recognized in California is a will which was executed outside of California and which was valid at the time and place where it was executed, or was valid in the place where the testator was domiciled or was a national, even if the will would have been invalid had it been executed in California. For example, if a will was validly executed in a foreign jurisdiction which requires only one witness (perhaps a notary public,) California will recognize that will, even though it does not comply with California’s two witness requirement. [NOTE: Notarizing a California will is not necessary and does not satisfy the requirement of having two witnesses.] Once a will is admitted to probate it does not matter what kind of will it is, whether witnessed, holographic or foreign. 

WHAT DOES A WILL ACTUALLY DO? – A will is effective only after the testator dies. It has no effect during the testator’s life. The named executor has no authority over the testator’s affairs until the executor is appointed by the court after the testator’s death and the beneficiaries under the will have no right to encumber their bequest or interfere with the testator’s use of the assets during his or her life. A will can be revoked or amended at any time. A will can dispose of all or part of an estate. Bequests can be very specific, such as “my watch goes to Fred” or general, such as “whatever I own when I die goes half to Fred and half to Martha.” “Pour-over wills” are typically used by people who have living trusts so that any assets they own outside of the trust when they die will be “poured over” into the trust upon their death.  

There are many rules and presumptions which are used by the court to interpret ambiguous wills, or wills in which certain beneficiaries are no longer alive or where certain specifically bequeathed property no longer exists. However, if the terms of the will are clear and realistically capable of being carried out, California has a policy of honoring the terms of the will, unless to do so would constitute a crime. Although a spouse cannot take away another spouse’s one-half community property interest in marital assets, a testator can completely cut out a spouse, a child or all of his or her relatives if the testator so chooses. California case law is replete with examples of seemingly bizarre bequests which the courts have honored, even though the results appear to be rather harsh, punitive or unfair. For example, a testator may completely cut out a dutiful spouse and leave the entire estate to an illicit lover. Or, the testator may disinherit a child who cared for the testator for years, while leaving the entire estate to the “no good” child who was never around. Except in cases of “undue influence” the reasons for the testator’s actions are irrelevant. The express terms of the will are enforceable and will be followed by the probate court even if they are the result of prejudice, revenge, spite or other base emotion.  Likewise, a will cannot be challenged on the grounds that the testator was punishing a child for the child’s choice of religion, spouse, occupation or lifestyle. The testator can be as arbitrary or whimsical as he or she pleases, as long as it is clear that the testator had testamentary capacity to make the will at the time it was executed. 

WILL CONTESTS: – There are basically four grounds for invalidating a will. A will can be denied probate if it is a forgery, if it has been revoked, if the testator lacked testamentary capacity when the will was signed or if the testator signed the will while under the undue influence of another person. Obviously a forged document is not the will of the purported testator. However, proving a forgery is not always easy. The best way to prevent allegations of forgery is to have a witnessed will with two (or even three) independent reliable witnesses who can verify later that the testator was acting under his or her own free will when the document was signed.  

Revocation of a will can be in the form of a writing which specifically references the will and states that it is revoked or by a subsequent will which disposes of everything which was disposed of under the previous will. Alternatively, a will can be revoked by physically destroying it or defacing it with the clear intent to revoke it. For that reason, it is difficult to probate a copy of a will in California. Unless the absence of the original will can be explained, there is a presumption that the original will was destroyed and revoked by the testator if the original cannot be found after the testator’s death. I normally recommend that the original will be kept in a safe deposit box or other safe place and that a copy of the will be kept at home with other personal and financial records, with the location of the original be marked on that copy.  

Testamentary capacity describes the mental (not physical) capacity to make a will. To have testamentary capacity a person must know “the natural objects of his bounty” (meaning the close relatives who would normally inherit in the absence of a will,) must understand the general nature and extent of his estate, must be able to appreciate the significance of executing a will and must not be acting under an “insane delusion” which materially affects the testamentary disposition. This does not mean that the person must be in great shape physically or mentally. In fact, even individuals who are under a conservatorship due to their inability to handle their own day to day affairs may be able to execute a valid will. Testamentary capacity must be evaluated on a case by case basis taking into account all of the surrounding circumstances. Most important in evaluating testamentary capacity is determining the extent of the testator’s long term and short term memory. In marginal cases, an evaluation by a physician or psychologist or documentation of the testator’s responses to questions which test long-term and short-term memory may be helpful in responding to a will contest after the decedent dies. The fact that a testator experiences some delusions does not necessarily mean that he or she cannot make a will, as long as the delusion does not affect the bequests made in the will. For example, a paranoid delusion that some unknown person is out to get the testator will not invalidate a will. However, a delusion that a deceased child’s ghost is out to get the testator may invalidate the will if that child’s issue (i.e., grandchildren of the testator) are disinherited on account of that delusion. 

Perhaps the most difficult will contest to litigate is one based on “undue influence.” Undue influence is present when a testator’s own free will is suppressed and someone else’s wishes are substituted. This can take the form of physical threat and coercion or can be more subtle, as in the case where an individual is isolated and becomes completely dependent on the person who is trying to influence the testator to leave the estate to that person. Suspicions of undue influence typically arise when estate plans are drastically changed immediately before the testator’s death and where large bequests are made to fiduciaries (such as attorneys, accountants or those entrusted with handling the testator’s affairs) or to nurses and care givers upon whom the testator has become dependent and where children and other common beneficiaries are inexplicably cut out. Again, merely disinheriting a child does not invalidate a will, as long as the disinheritance was not the result of undue influence or insane delusion. 

TAX CONSIDERATIONS: – In general, any assets passing at death are includable in the testator’s federal taxable estate, whether those assets pass under a will, in intestacy, by joint tenancy, beneficiary designation, life estate or otherwise. The existence of a will is irrelevant except to the extent that the will passes property to persons other than the spouse or to a qualified charity (such as PRO) as to whom property passes tax free. For married testators, provisions can be included in a will to utilize the testator’s estate tax exemption, using a “testamentary by-pass trust” or an outright bequest to persons other than the spouse or a charity. [Trusts will be discussed in detail in a future article.] Any property passing under a will, as with property passing in intestacy, gets a “stepped up” tax basis to the value at the date of the decedent’s death, so that the beneficiaries can sell the assets later without paying tax on the appreciation (or capital gain) which accrued during the decedent’s life. 

MEDI-CAL: – Wills have no effect on a person’s qualification for Medi-Cal. If a person dies after having received Medi-Cal benefits, a claim will be filed against the estate by the Department of Health Services for reimbursement. One area where a will can affect Medi Cal recovery is in the case of a spouse of a Medi-Cal recipient who predeceases the Medi Cal recipient. Without a will, all or a portion of the estate will go to the Medi-Cal recipient and disqualify that recipient from receiving further benefits until the inheritance is spent down. However, if the spouse had disinherited the Medi-Cal recipient in the will, the recipient would receive nothing and would remain qualified for Medi-Cal benefits. (Health Services can assert a claim against the spouse’s estate if the spouse post-deceases the Medi-Cal recipient, but not if the spouse predeceases the recipient.) 

TIME AND EXPENSE: – The most common concern about having a will is the delay and expense of a probate proceeding. As I indicated in the May article, the expense and delay of administering a “testamentary estate” (i.e., where there is a will) is essentially the same as administering an “intestate estate” (i.e., where there is no will,) except that, with a will, the executor’s bond can be waived, thereby saving the estate a few hundred dollars. The same court procedure is used and the same statutory (or negotiated) attorney fees and costs apply. The minimum time to administer an estate is six months. It takes a month for the executor to be appointed by the court, followed by a four month creditor claim period and one month to close up the estate after that creditor claim period expires. With or without a will, estates can take much longer to probate if there are complications, creditor litigation, property disputes, difficulty locating or liquidating assets, tax problems, etc. 

Wills are relatively inexpensive to create. The real expenses do not arise until the will must be filed for probate following the testator’s death. If, after taking out any joint tenancy property and assets which pass by trust or beneficiary designation, the testator’s probatable estate is less than $166,250, then the will does not have to be probated and the assets can simply be collected by the beneficiaries using a declaration. If the estate exceeds $166,250 or if the beneficiaries will not cooperate in using the small estate collection process, then probate is necessary. The expenses of probating an estate include: the initial filing fee; newspaper publication costs; probate referee’s fee to appraise the estate (one-tenth of one percent of the estate); executor’s bond premium which varies depending upon the size of the estate; the executor’s commissions, and; the attorney fees. The executor’s commissions and attorney fees are both negotiable and should be based upon the actual amount of work that needs to be performed in the case. In the absence of a negotiated fee agreement, the commissions and attorney fees are computed under a formula in the Probate Code based upon a percentage of the estate; specifically, 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000 and decreasing thereafter. In addition, the executor and attorney are entitled to “extraordinary” compensation for special services such as selling real estate or conducting creditor litigation. The total expense for handling a probate proceeding depends upon the size and complexity of the estate, problems which arise during the administration and any fee reduction which the executor can negotiate with the attorney. 

In the next installment in this series we will look at trusts to see how they compare with wills not only in terms of expense, but also in terms of the other estate planning concerns which you should be considering in evaluating your overall estate plan.