Wills, Estate Planning & Probate
I. Advance Directives
A. Durable General Power of Attorney Tenn. Code Ann. § 34-6-101, et seq.
Durable General Power of Attorney authorizes the appointment of an attorney-in-fact to handle a broad range of transactions or decisions. Once executed, and until or unless revoked, a Power of Attorney will continue in full force and is durable if it contains language that it will "not be affected by the subsequent disability or incapacity of the principal." It can be a very helpful, but powerful, document and should be executed only after careful consideration. All authority of an attorney-in-fact under a power of attorney ends at death.
“Springing” Durable General Power of Attorney-- A power of attorney which does not become effective unless or until the Principal (i.e., the person granting the power of attorney) becomes disabled or incapacitated.
B. Durable Power of Attorney for Health Care Tenn. Code Ann. § 34-6-201 et seq.
A Durable Power of Attorney for Health Care is a broad document that grants another person the authority to make healthcare decisions on your behalf prior to circumstances arising under which a Living Will or Advance Care Plan (ACP) would become effective.
C. Living Will Tenn. Code Ann. § 32-11-101, et seq.
A Living Will is a document that allows for the cessation of extraordinary life prolonging medical treatment where death is impending and an individual has no hope for recovery. It may also address the handling of nourishment and fluids. A living will may also allow for organ donation and direction regarding the disposition of your body.
1. A Living Will or ACP may be used in conjunction with a durable power of attorney for health care to ensure your medical care decisions are placed in the hands of someone you trust when you are unable to make those decisions yourself.
2. A Living Will or ACP alone may not solve all medically related decision making issues that arise for an incapacitated person.
3. Generally, individuals have the right to direct decisions on the disposition of their remains or to designate a person to make those decisions. If a person dies before doing so, the right descends to the following people in the order listed:
Spouse of decedent
Adult children of decedent
Parents of the decedent
Adult siblings of the decedent
Adult grandchildren of the decedent
Grandparents of the decedent
An adult who has exhibited special care and concern for the decedent
4. The Health Care Decisions Act, Tenn. Code Ann. § 68-11-1801, et seq., is a statute designed to allow patients to plan for future treatment and invest power in a healthcare Agent to make decisions for the patient when the patient is incapacitated. In some respects, it can serve as an alternative to a living will or ACP.
A conservatorship is a court supervised proceeding for an adult with a disability. The conservatorship can be used to care for property on behalf of the disabled individual. It can also be used to care and make both medical and financial decisions on behalf of an individual. A conservatorship is needed when no power of attorney has been executed; if the attorney in fact acted improperly; or for other good cause.
In a case where a conservatorship is sought, the court appoints a conservator and provides letters of conservatorship to effectuate the appointment.
Likewise, a guardian may be appointed for a minor. The guardian serves nearly an identical purpose for said minor.
A. What is a Will?
A Will is an instrument that provides for distribution of one’s assets, both tangible and intangible and addresses debt handling following your death. It also allows you to designate the person to be in charge of your estate (known as an Executor or Personal Representative), designate the Trustee of any Trusts created under your Will and designate the guardian of the person and property of any minor children. There are generally three types of wills: Nuncupative, Holographic and Attested.
Numcupative or Oral Wills are very rare and very limited in scope. Such a Will may only be made by a person in imminent peril of death, whether from illness or otherwise, and shall be valid only if the testator died as a result of the impending peril and must be declared to be the testator’s Will by the testator before two (2) disinterested witnesses, must be reduced to writing by or under the direction of one (1) of the witnesses with thirty (30) days after the declaration and must be submitted for probate within six (6) months after the date of death of the testator. However, an Oral Will may dispose of personal property only with a value no greater than $1,000.00, except in the case of active military service, where the amount is increased to $10,000.00. The Oral Will neither revokes nor changes an existing written Will. (Tenn. Code Ann. §32-1-106).
In Holographic or Handwritten Wills, all material provisions must be in the handwriting of the testator and it must be signed by the testator. Preferably, it should be signed and dated so as to clarify whether the Holographic Will revokes an earlier Will, whether typewritten or holographic. Subsequent to the testator’s death, the handwriting and signature of the testator must be proved by two (2) disinterested witnesses. (Tenn. Code Ann. §32-1-105).
Attested Wills are the most common type of Will. An Attested Will is typically a type written document which is attested to by the testator and two (2) disinterested witnesses. Attached to the Will is an Affidavit of the witnesses swearing that they witnessed the signature of the testator; that they signed in the presence of each other and the testator; that the testator signed in the witnesses’ presence; that they all signed in each other’s presence; that the testator and the witnesses were over the age of eighteen (18); and that the testator requested that the witnesses witness the signing of the Will. It is customary that a notary be present and notarize the signatures of the testator and the witnesses. An Attested Will may be amended by Codicil. A Codicil must be executed with the same formalities as an Attested Will. A Codicil is an efficient way to make minor amendments to a Will that has been previously executed to either change, delete or add a provision to a Will. However, extreme care should be used in preparing a codicil so as not to inadvertently change other provisions of the Will previously made, create ambiguity in the Will when read as a whole with the Codicil, or create an inconsistency with the terms of the Will previously executed.
B. Who can make a Will?
Anyone eighteen (18) years of age or older can make a valid Last Will and Testament.
However, the Testator must be competent and not be unduly influenced to make the provisions in the Will in order for the Will to be valid. To be considered competent, the testator must understand the basic make up of his or her property, realize the identity of the natural objects of this or her bounty and be cognizant of the fact of the making of the Will and understand how the property of the person will be distributed following his or her death pursuant to the terms of the Will. Persons of diminished capacity or who are suffering from long term illness should be careful in making a Will to assure that the witnesses are convinced that the person understands and is competent to make the Will.
C. What does my Will control?
One of the biggest misunderstandings about estate planning concerns the effect your Will has on property in which you own an interest at the time of your death. Your Will only controls assets that are in your name that are not jointly held with right of survivorship with another person(s) and that are not payable on death by a beneficiary designation. For instance, if you own a bank account joint with right of survivorship with another co-owner, even if you intended only to place the co-owner’s name on the account as an accommodation to be able to transact business for you on the account, at your death all right, title and interest in the account will pass to the other joint owner free of any claims of beneficiaries under your Will. Accordingly, it is imperative that the way you own your property compliments the intended disposition under your Will. Use of a Durable Power of Attorney for business affairs is a better alternative than joint ownership where particular assets or all assets of your estate are intended to be distributed among multiple beneficiaries.
D. Reasons for Having a Will
The Last Will and Testament is a classic estate planning tool authorized by statute for the purpose of devising certain property to heirs or other individuals. Although not required by law, a Last Will and Testament allows the individual making the will to direct the distribution of property to individuals identified in the Will.
If an individual dies without a Last Will and Testament, the State of Tennessee determines how the individual’s assets are distributed on her behalf. The process of distributing assets to heirs where the individual dies without a Will is intestate succession. Under this scenario, heirs of the deceased are prioritized according to statute.
A last Will and Testament also allows you to choose who will handle the administration of your estate and to decide who will be the guardian of any minor children. By preparing a Will, you may be able to reduce estate and inheritance taxes as well as probate expenses such as bond. A Will often simplifies the probate process by designating executors, personal administrators and trustees but also by waiving bond, inventory and accounting. A Will also allows you to plan for Special Needs Beneficiaries and Contingent Beneficiaries.
E. How often should a Will be updated?
It is recommended that you review your Will once a year to re-familiarize yourself with the provisions of the Will and to determine whether an update is necessary. A general update with your attorney is recommended at least once every five (5) to eight (8) years. Generally, you should update your Will any time there is a change in the nature of your estate assets or the disposition of assets; any time there is a change in your family status (marriage, divorce, death, birth, adoption); and any time there is a change in the applicable law.
III. Probating and Administering Wills
A. What is Probate?
Probate is the administration and court supervised proceeding whereby a fiduciary acts upon a will. It is a formal process by which to “prove” the disposition of a decedent’s estate. A decedent’s assets are collected and safeguarded, valid obligations are satisfied, assets are transferred in accordance with a duly proven Will or the laws of intestate succession. If the decedent had a Will, the probate is considered a Testate matter and generally, the Executor identified in the Will acts on the decedent’s wishes. If the decedent did not have a Will, the probate is considered an Intestate matter and the court will appoint an Administrator to manage the decedent’s estate according to Tennessee law.
B. When is Probate administration necessary?
Probate is necessary when there are assets that are owned solely in the decedent’s name with no named beneficiary or where the decedent has debts that must be addressed. It is also necessary where the decedent’s Will contains directions which require court validation. Family dynamics may also trigger the need for probate. Filing a probate action may also preserve the statute of limitations in certain circumstances.
C. Types of Probate Proceedings.
The most common types of probate include solvent estates, insolvent estates, small estates (not over $50,000.00); lost Will; muniment of title and ancillary probate.
D. Probate Procedure.
The probate process usually lasts 9 to 18 months, but can last longer depending on the complexity of the estate or work involved in distributing assets. Upon the death of an individual, a Will may be filed with the Probate Court (in Knox County, Tennessee the Will should be filed with the Chancery Court, Probate Division). A petition will also be filed which will seek the appointment of a personal representative. If there is no Will, then a petition is filed requesting the appointment of a personal representative. The proposed personal representative may be required to post a bond at this point. Bond may be waived in a Will but where there is no Will, the personal representative must post a bond based on the estimated value of the probate estate. Thereafter, notice to creditors will be made before distribution of assets.
The personal representative must marshal the assets of the estate, pay all valid claims against the estate and thereafter distribute property in accordance with the Will or laws of intestate succession. The personal representative may also have to file inheritance tax or estate tax returns and pay taxes due, from the estate. The personal representative will be required to obtain a TennCare release if the deceased is over 55 years old. Once all valid claims are paid and releases are obtained, the remaining assets may be retitled and distributed.
Of note, some distribution issues may be resolved without a Will and not by intestate succession. If an individual owns assets (most commonly financial assets) which are payable on death or jointly owned with right of survivorship, these assets pass outside of probate in accordance with the contract for the asset. However, in the event the individual has not named a beneficiary or the account does not identify to whom distribution will be made upon the individual’s death, such assets may become probate assets.
Other non-titled assets will become a probate asset and property which may pass despite probate may still require the probate process to be undertaken to dispose of the asset.
E. Payment of Claims Against the Probate Estate.
Claims of creditors will be classified and paid, as assets are available, in the following priority:
1. Cost of administration, including, but not limited to premiums of fiduciary bonds, court costs and reasonable compensation to the personal representative and the personal representative’s attorney.
2. Reasonable funeral expenses.
3. Taxes and assessments imposed by the federal or any state government or subdivision thereof and claims from the Bureau of TennCare.
4. All other valid demands which may be filed within the statutory claims period which are not in dispute or are otherwise authorized by the Court.
The personal representative is required to pay claims in the order of priority. All claims of all preceding classes must be fully paid before any other claimant of a subordinate class may be paid. In the event the estate does not have adequate assets to pay the claims of its creditors, they are paid pro rata. At common law, claims of the State of Tennessee are entitled to priority over the claims of general creditors.
F. Intestate Succession.
If you die without a Will, your property will be distributed pursuant to the laws of intestate succession. Tenn. Code Ann. § 31-2-104.
If you are married with NO living children, grandchildren, etc. (by current marriage, prior marriage, out of wedlock or adopted), all of your property goes to your surviving spouse.
If you are married, with children and grandchildren, one-half of your property goes to your surviving spouse, if you have one child. If you have more than one child, one third of your property goes to your surviving spouse and the remainder is divided equally among your children.
If you are single or widowed, with children and/or grandchildren, your property will go to your children equally. Grandchildren through any deceased child will receive their parent’s share.
If you are single or widowed, with no living children, grandchildren and your parents are still living, then your property is divided equally between your parents, even if they are divorced, or to the survivor of them.
If you are single or widowed with no living children, grandchildren, etc. and your parents are not living, then your property is divided equally among your surviving siblings. If a sibling has died, their portion goes to their children, grandchildren, etc.
If you are single or widowed with no children, grandchildren, etc. no surviving parent, no surviving sibling, but you are survived by your grandparents or the issue of a grandparent (aunt, uncle, cousin, etc.), then one half of your property goes to paternal grandparents and one half to your maternal grandparents, if you are survived by grandparents on both sides of your family or their descendants. If there is no living grandparent or their issue on one side of the family then all of your property goes to your grandparents on the other side, or their issue.
If you are single or widowed with no living issue, siblings (or their issue), parents, grandparents (or their issue), your property shall pass into the treasury of the State of Tennessee.
IV. What is a Trust?
A Trust is a separate legal entity, which is controlled by a Trustee. A trust may be established before death and may be revocable (sometimes called a “Living Trust”) or irrevocable. A Trust may also be established in your Will upon your death (“testamentary trust”). Since your Will can be revoked or amended between the time you make it and the time you die, a testamentary trust is revocable but becomes irrevocable upon your death.
Some individuals may wish to use other devices to distribute assets outside of “probate” through trusts. Generally, individuals are concerned about the privacy of the probate process or may wish to mitigate the tax liability their estate might otherwise incur. Furthermore, an individual may have concerns about the credit situation or management of the bequeathed property by the person receiving the property. A Trust, whether established before death or in a Will may also be used to provide for an incapacitated child, spouse, or held for a child until they reach a specified age. Additionally, a Trust may assist an individual in meeting charitable goals. A Trust may also be used to provide for a surviving spouse during his or her lifetime, but provide that the remainder of the assets placed in such a Trust are to pass to your children when your spouse dies. This is especially effective for blended families involving spouses with children from prior marriages. Estate Tax planning is usually incorporated by trusts. Trusts are commonly used in the following situations:
1. To manage assets during lifetime;
2. In deference to privacy concerns;
3. To avoid probate (replace probate proceedings with trust administration);
4. To avoid ancillary probates;
5. To address issues with specific beneficiaries;
6.To provide a detailed or complex plan of distribution;
7. To nominate fiduciaries; and
8. To provide planning for nontraditional couples.
In such situations, a Trust may be an appropriate tool to distribute the individual’s assets. These devices can be very complex and it is highly recommended that an attorney be consulted when making decisions to establish a Trust.
V. Gift and Estate Tax
In the past, both the state and federal government have imposed certain taxes upon wealth transferred to another. Tennessee recently enacted legislation to repeal its inheritance tax, depending on the date of death. From 2012 through 2015, the inheritance tax exemption adjusted upward, and was eventually repealed in 2016. Therefore, there is no Tennessee inheritance tax related to deaths occurring from 2016 forward.
The federal inheritance tax rate is dependent upon the size of the taxable estate. Importantly, the taxable estate is different than the probate estate. The taxable estate is virtually all property for which the decedent has an interest at the time of death. As such, certain property (such as life insurance, jointly owned property, real property and retirement plans are included in the taxable estate).
With respect to federal taxes on estates, for several years, the estate lifetime tax exemption has been $5.49 million, but was increased to $11.18 million in 2018 and $11.4 million in 2019. It was raised to $11.58 million in 2020 and $11.7 million in 2021. Both spouses’ estates may use the total exemption. As a result, married couples may pass $23.4 million dollars tax free in 2021.
The above stated, other taxes may impact an estate. For example, if an estate has more than $600.00 in gross income from the date of death until the final distribution, or has a beneficiary who is a nonresident alien, a federal income tax filing may be appropriate and the income may be taxed.
From 2013 to 2017, the Gift Tax Exclusion has been $14,000.00 per year per donee. However, in 2018 it increased to $15,000.00. You are allowed to give away up to $15,000.00 to as many people as you wish without those gifts counting toward your lifetime exemption. If you or your spouse makes a gift to a third party, the gift can be considered as made one half by each spouse. This is known as gift splitting. Both spouses must agree to the gift. Gift splitting allows a person to double the amount given to a done without making a taxable gift. As a result, married couples may “split” the gift allowing them to give up to $30,000.00 to one individual, tax free. Certain tax filings are required for splitting a gift.
Other considerations include the Generation Skipping Tax which is applied to direct transfers from, for example, a grandparent directly to a grandchild. This avoids double taxation which may arise when the money is left first to the child and then to the grandchild.
VI. Charitable Giving Alternatives
The most common charitable gift is an outright gift during a lifetime or a bequest at death. In almost every scenario, the tax benefits are greater from lifetime transfers to charity rather than at death. By making a transfer during lifetime, the charity has immediate use of the resources, the asset is no longer in the donor’s taxable estate and the donor can realize a charitable income tax deduction at the time of making the gift. However, if the transfer occurs at death, the decedent’s estate must elect either an income tax deduction or an estate tax deduction, but may not take both.
Other types of commonly used charitable gift plans are as follows:
A. Charitable Gift Annuity. A charitable gift annuity is often a gift of choice when a guaranteed income is desired. A gift of cash or securities is transferred to the charity in exchange for a contractual lifetime income paid monthly or quarterly. The contract is in almost every circumstance engaged with an insurance company chosen by the charity. The income is guaranteed by the issuing charity. A portion of the gift is invested and used to provide income for life, and the remaining portion qualifies as a current gift to the charity. Any capital gains taxes due on the asset that was exchanged for the annuity are paid over the annuiant’s life expectancy. A charitable gift annuity is especially attractive to older donors with the need for additional income as the payout rate can be higher to the donor under the annuity and still realize a higher income tax deduction. The gift annuity also has very low transactional costs relative to other charitable trust planning.
B. Charitable Remainder Annuity Trust (CRAT) and Charitable Remainder Unitrust (CRUT). A CRAT is a charitable trust that receives property from the donor, liquidates the property and in most cases invests the property in marketable securities, from which a set annuity is paid for life or a term of years to the donor. At the end of the term of the trust, the remaining assets in the trusts are payable to charity. An income tax deduction is immediately available to the donor for the present value of the future remainder interest that will pass to charity. In periods such as the present, when the applicable federal rate is low, a CRAT typically produces a lower income tax deduction than when the discount rates are higher. A CRUT is designed to pay out a specific percentage of the value of the gift to the donor each year for the term of the trust. Like a CRAT, a CRUT pays the balance of the assets to the charity at the termination of the trust. Both a CRAT and a CRUT create an income stream for the donor for life or the term of years elected by the donor, removes the remaining interest of the trust from the donor’s estate and creates a present income tax deduction.
C. Charitable Lead Trust (CLT). A CLT is often viewed as the opposite of the charitable remainder trust. A donor transfers property to the lead trust, which pays a percentage of the value of the trust assets, or a specific annuity amount, whichever is designated by the donor, to the charity for a term of years. At the end of the trust term, the remaining assets in the trust and any growth it has realized are passed either to the grantor or to the grantor’s heirs, whichever is selected by the grantor. During times when the applicable federal rate is low, a CLT is an attractive means to make available assets to the charity of choice for the term of the trust yet distribute the remaining assets to the donor’s heirs at the termination of the trust with little or no gift or estate taxes.
D. Coupling Wealth Replacement Trust with Charitable Trust. A technique often utilized in estate planning involving charitable giving is to establish a wealth transfer replacement trust to complement the charitable trust. Assets that would ordinarily be taxable in the decedent’s estate are placed in the charitable remainder trust or gift annuity. This ultimately removes the assets from the donor’s estate at the termination of the trust. From the annuity or unitrust payment to the donor, the donor would invest a portion of the income stream in an irrevocable trust established by the donor for the benefit of the donor’s family. The income stream to be generated from the charitable remainder trust is hopefully large enough to cover the corresponding income taxes on the income stream and leave enough assets remaining from the income stream to service the premiums on a life insurance policy. The irrevocable trust then purchases a life insurance policy on the life of the donor, which is owned by the irrevocable trust and is not treated as part of the donor’s taxable estate at death. At the donor’s death, the assets in the charitable trust pass to the charity, but the life insurance policy proceeds are paid to the irrevocable trust, outside the donor’s taxable estate, and therefore passes tax free to the donor’s family replacing the wealth given to charity.
VII. Potential Pitfalls in using Generic Form Wills
To be sure, planning for and obtaining the documents we have discussed herein do cost money. Often, individuals may be enticed by lower cost alternatives to obtaining counsel. One prominent example is the form services that are provided on the internet. Unfortunately, these may not always prove to be the best alternative for the drafter.
First, every testator’s situation is unique. What may work well for one individual may not work for another, creating unintended results. Specifically, certain form documents may not account for the adult child who one wishes to disinherit or create a testamentary trust to protect the adult child from the child’s own creditors. Additionally, forms cannot analyze every scenario with respect to tax implications or changing desires of the testator during the drafting process.
Second, when drafting an attested Will, it is imperative that the formal procedures for notarization and witnessing the execution of the same be followed. Failure to follow the formal procedures may result in the Will being challenged and ultimately not probated.
Third, general forms are simplistic and do not necessarily account for unforeseen situations or problems that might arise after an individual’s death, i.e., such as angry family members or potential probate challenges. Engaging counsel at the drafting stage may help avoid traps or uncover beneficial results that might be overlooked when completing a form.
VIII. Who Can Be a Fiduciary?
Not just anyone can qualify to be an executor, administrator, guardian, fiduciary, power of attorney or conservator. A sentence of imprisonment in the penitentiary ends the right of the inmate to hold such office. (Tenn. Code. Ann. § 40-20-115)
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