In this series, Mike Patton looks Under the Hood on wills and estate planning.

When a client asks for your advice on creating or reviewing their estate plan, how do you proceed? Even though you as an advisor may not be the primary estate planning team member, you are in a unique position to add value. For instance, by learning to identify discrepancies in an estate’s dispositive provisions, the advisor can work with the client’s attorney to help foster a more team-oriented, coordinated effort which will help assure the wishes of the client are adequately met. 

In our first article on this topic, we looked at What You Need to Know About Wills: The Checklist. In this article, the second in a series on how to review a client’s will, we’ll continue our analysis of the clauses contained in a will. 

Overview

A will is divided into multiple clauses or sections. Each clause conveys the testator’s wishes in a particular area. I have identified 12 clauses. This number will vary based on applicable state law and attorney preference. Our goal is to identify issues in the will which could thwart the testator’s wishes.

Problems can arise for many reasons.For example, if the attorney doesn’t have a complete picture or if he is practicing outside his area of expertise, the estate plan could fail.

At times, a client will hire an attorney who is also a friend, hoping to save a few dollars. However, if the attorney is unfamiliar with estate and tax law, the document may not accomplish what the client intends. Unfortunately, the client may not realize it.

If errors are eliminated and the document is unambiguous, the survivors should experience a smooth and less stressful transition. This is especially important since the death of a loved one is one of the most stressful events any of us will ever face. 

There is an excellent opportunity for any advisor who decides to enhance his estate planning expertise. It’s important that the attorney views the advisor as an ally and not an adversary. In short, if the advisor discovers an error, it must be handled with care so the attorney will not feel threatened. 

The Clauses of a Will

Even though this list is in the first article in this series, I have included it here for convenience. Here are the 12 clauses typically found in a will: 

1) Introductory

2) Debts

3) Tax

4) Tangible Personal Property

5) Real Estate

6) Specific Bequests of Intangibles and Cash

7) Residuary

8) Powers

9) Appointment of Fiduciaries

10) Testators Signing

11) Attestation

12) Other Clauses and Provisions 

Now let’s resume our deeper dive into each of these clauses by focusing on clauses five through eight. 

5) The Real Estate Clause

Issues to check in the Real Estate clause:

Does the testator own any real estate?

How is the property titled?

Is the real estate located in a state other than the testator’s state of domicile? 

Based on the location and titling of the real estate it may or may not be subject to the probate process. If the real estate is subject to probate and located in a state other than the testator’s state of domicile, it will be subject to ancillary probate. This will require the services of an attorney licensed in the state where the property is situated. Ancillary probate will also increase the cost and extend the time it takes to settle the estate. 

To avoid probate, the real estate could be titled jointly with a right of survivorship (state law permitting) or placed in a trust. Some states also allow a transfer on death (TOD) title. However, you should check with a qualified professional familiar with the laws of the state in question. 

6) Specific Bequests Clause

Issues to check in the Specific Bequests clause:

Are there any specific bequests?

Has each item and recipient been clearly identified?

Is there a specific bequest of publicly traded stock?

If so, has replacement property been identified in the event the stock is sold prior to death? 

It’s important to assure that the asset is adequately described and the recipient is clearly identified. If there is a possibility that the property could be sold, stolen or otherwise disposed of prior to death, replacement property should be listed. 

7) Residuary Clause

Issues to check in the Residuary clause:

Is there a clause to transfer the residue of the probate estate to a trust?

Are there any items the testator would not want to be governed by a trust?

Is there pour over language in the will?

If there is pour over language, has a valid inter vivos trust (i.e. living trust) been established?

Are any residuary beneficiaries a minor or an incompetent? 

Here’s a ‘pour over’ example: A person creates an inter vivos (i.e. living) trust which may or may not be funded. In the will, pour over language is included which directs the executor to move assets into the trust at death, thus escaping probate. To be effective, the trust must be executed at the same time or prior to the creation of the will. 

8) Powers Clause

Issues to check in the Powers clause:

Does the will contain “independent executor” language?

Independent executor language permits an executor to operate independent of the supervision of the Probate Court which allows the probate process to move more quickly. This is only applicable if permitted by state law and expressly stated in the will.

Is the liability of the executors or trustees limited by the will?

Are there any limits on their powers (i.e. cannot make certain investments)?

If there is a marital trust, does the power adversely affect the marital deduction?

Example: If the will contains specific language which authorizes the surviving spouse to demand that non-income producing property be sold and replaced with income producing property, what if the non-income producing property is shares of a closely held business? Would the sale cause a loss of family control?

If there is a business, can the executor continue operating it?

Is the executor qualified to run the business?

Is a bank or other institution named as executor or co-executor?

If co-executor, how will final decisions be made? Will each executor have equal authority?

If a bank is named, is the bank allowed to invest in its own stock without a conflict of interest? Is there a limit on the amount? 

Conclusion

The process of estate planning can be complex. A will is only one tool but it needs to be coordinated with all estate dispositive provisions to assure that those who inherit receive the correct asset in the intended proportion.

When death occurs, it brings with it a bevy of emotional turmoil at a time when important financial decisions must be made. Therefore, to the extent we can address these decisions prior to death, the entire process will run more smoothly, resulting in less stress and greater peace of mind for those involved.  

In my next article in this series on how to review a client’s will, we’ll conclude by discussing clauses nine through twelve. This includes the Fiduciaries Clause which is one of the more important sections in the will. 

Until then, thanks for reading and have a great day!