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Meador: What are some of the non-positive things?
Peterson: Okay, so the cons of the will are wills go through probate. That's number one.
So you are going to have to go through the probate process if you have a will; the will
is not effective to transfer anything by itself. It has to be approved by the probate court,
the executor that is nominated in the will but the probate court points the executor.
So if you were to take . . . let's say I passed away and my wife Debbie were to take our wills
into the bank and she said hey look Chris named me as the executor and I'm also the
person that is the heir under the will.
The bank would go that's say really sweet, Debbie. We're glad Chris took care of you.
Now go down to the probate court and get a judge to sign something that tells us that
we have to do it. And that's what letters of testamentary are. The court essentially
approving that will is valid and naming who has the power over the will.
That's the other con is the will is really about nominating and making clear of your
wishes but the power over that will still rests in ultimately in the hands of the probate
court. The probate judge is the one that appoints the executor. Your executor is going to have
to submit an inventory of your assets as part of the probate process. The judge has to approve
that inventory.
If there is disputes about anything under the terms of your will, or a beneficiary contests
the terms of your will, the probate judge is going to make the decisions about those
contests so really the power in a will really is housed at the probate court.
One of the negatives about that is wills are a little easier to contest than trusts are.
It is much easier to bust a will than it is to bust a trust and so that tends to be a
problem. That's also true of beneficiary designations. It's much harder to bust up a beneficiary
designation than it is to bust up a will.
Probably another con is that there's really two types of assets that make up an estate.
One is probate assets and one is non-probate assets, so non-probate assets are things that
pass by contract generally. So your retirement accounts, your investment accounts, your bank
accounts, things of that nature.
Your will doesn't control those things. Your beneficiary designation does. And so those
are going to pass outside the probate process. That is very confusing for a lot of people.
They think, "Well, I was named as the beneficiary in the will but here Jay got my bank account.
How did that happen?" Well, it's because the bank account passed through right of survivorship
or beneficiary designation and not through the will. And so that can be somewhat problematic,
so we see kind of that unfunded estate situation occasionally with wills too.
And then I would say that just kind of piggybacking on what we talked about when people do their
own wills or pull it out of the book, the problem is that a lot of wills are just not
done well and they either are defective in some way, or they just don't take into account
all of the considerations and so that's kind of another con that we see with wills, especially
with so many people trying to draft their own.
Peterson: With a well-drawn up will though, the probate in the state of Texas is not that
horrible for most situations.
Meador: It really depends on what kind of probate that it is. There many different types
of probate process in Texas so you might have a probate that is [inaudible 00:04:23] title
or an independent administration probate.
Those are less cumbersome than the traditional dependent administration or "mother may I"
type probate process that most people hear horror stories about. But what I am surprised
about constantly in practice . . . I think I told you earlier I. I did a state planning
seminar yesterday kind of for the general public and after I do those seminars what
amazes is me how many people come up to me afterwards and talk to me about the problems
that they had during the course of their probate and how burdensome it was, how delayed things
got in the probate process, how much disagreements there were, those sorts of things.
So while it is possible to have a kind of a smooth probate process, particularly in
Texas, I would say, one, that is not generally the case in other states and number two, what
I find walking into my office or that I hear about is lots of people who had really bad
experiences in the probate process.
Meador: Another thing I've found is people that have out of state interest in anything--land
or oil, royalties or whatever--is it is a huge problem in that situation.
Peterson: Oh yeah, absolutely because if you have stuff in more than one state, even if
you got a really great written will, and let's say that the will is valid in all of the states
in which you have property, the truth is that you got to do what's called an ancillary probate
in the states where you are not resident. So you do a probate in your state and an ancillary
probate in another state.
So you know like we had a client recently that they owned a house here in Texas, a house
in Colorado, and then an inherited property in Utah. Well, if they died with the will
and only a will in Texas, what we would have ended up doing is we would have probated their
primary state in Texas and then we would have probated two more times, once in Utah and
once in Colorado.
But for some people, a will is really good enough and I would say that's kind of the
base level of estate planning. So if clients have problems about doing more advanced planning
than that, they at least ought to do a will because they at least ought to take advantage
as much of the, particularly the Texas probate code as they can.
Meador: Right, that's great. So who can execute a will?
Peterson: The funny thing about executing of the will is the standard is very, very
low. Basically, you have to be someone who is an adult or an emancipated minor. Somebody
that has legal capacity and what they basically have to understand is they have to understand
the consequences of making the will. So if I name you as being the beneficiary of my
estate, I got to understand that my stuff is going to go to you and I also have to understand
who are the natural objects of my affection.
So I have to know gosh my . . . I would normally give it to my wife but I am choosing Jay instead
but as long as I understand, as long as I'm an adult and I have . . . nobody has taken
away my legal capacity in court and as long as I understand who I would normally give
stuff to and how I am giving it in the will, that's really all that's required and that
is a much lower standard than what we think of as typically capacity. It's also a much
lower standard than what we generally consider capacity for signing a contract, so it's kind
of interesting how low that capacity can be.
So one practical examination or kind of example of that is sometimes with elderly clients
they'll have a little bit of dementia and a lot of times they will have what's called
Sun Downer's Syndrome which is they are really good in the morning and the closer it gets
to sun down the less well that they do in their mental capacity. So those folks, perfectly
okay for them to sign a will. It's not a problem at all, but when you conduct the signing you
probably want to do it eight o'clock in the morning not five o'clock in the evening when
they're at kind of there highest and best peak but legal capacity for signing a will
is a very low standard.
Meador: Wow, wow. So what are some of the clauses in wills?
Peterson: So what you are going to see when you draft a will, or when you see a will that's
been drafted is you're going to see some standard clauses that you should look for. So if somebody
brings you in a will you ought to be able to clearly identify these and frankly you
need to identify them too because I think they are on your CFP exam. So that's the other
practical element.
Meador: Yeah.
Peterson: The first one is what we would call an introductory clause or identification clause.
It just sets out this who I am and I'm making a will. This is where I'm a resident of. Typically,
there'll be a declaration clause and in that declaration clause, you will kind of declare
I am making my last will and testament and this is what I want done so you're doing that.
Sometimes we will see what's called a specific request and so specific request is some item
or some amount of money that you want to pass to a certain individual, so you may have a
will that said . . . well let me stop there. What we also typically see is a residuary
bequest or a remainder bequest so that is--this is where I want the bulk of my estate to go.
So the way those two work together is specific bequest and the residuary bequest is . . . let's
say in my case, I really want my entire estate to go to my wife but I would like for you
to have my car. So I put in my will that I want Jay Meador to have my car and the residue
of my estate goes to my wife. So the car is a specific bequest and the rest of the estate
is the residuary clause so my wife is going to get everything other than the car which
you are going to get.
In a will, you are also going to see an executor clause or an appointment clause which is where
you are going to nominate your executor. We often see in wills a guardianship clause,
so if you have minor kids you are going to put a clause into the will that says who I
would want to raise my kids if I cannot raise them myself.
We'll see a tax appointment clause so we will . . . what that will do is it . . . we talked
earlier about the division of costs between specific requests and the remainder bequest
so what we will see that in tax clause is if the state taxes have to be paid this is
how those are going to be paid, or this how the debts of the estate are going to be paid
and who is going to share in that.
We see an attestation clause which is really about the signature, right? So we will see
the signature and we will see a couple of witness signature. If you are from Florida,
we will see three witness signatures. And so it's just you attesting that this is my
last will and testament and I approve of the distribution scheme that I set out.
And then what you should see at the end of the will, which is often left out of wills,
is what's called a self-proving affidavit clause and the self-proving affidavit clause
will again be the person making the will, it will be them affirming in front of a notoriety
public that this is their last will and testament, that they are over the age of 18, that they
are competent, that they understood what they were signing, that they were signing as their
free act and deed, and that they signed in front of the witnesses.
And then the witnesses will be swearing that they are over the age, in Texas, of 14, that
the person signing the will is over the age of 18, that-that the person signing the will
is competent, that they signed in the presence of the witnesses, and that the witnesses signed
at the presence of each other and then that self-proving affidavit is notarized by notary
public who is different than the person signing the will and different than the two witnesses
to the will. Basically what that allows you to do, that self-proving affidavit, allows
you to probate the will without having the witnesses to the will show up at the probate
court.
Meador: That would be important, yeah.
Peterson: Yeah, it's especially important because like in this one estate that we did
that we probated which was a very expensive probate because of this reason. Well, first,
we had a handwritten will so that was a starting point. They actually did have two witnesses
to the will and they pulled up something from Office Depot, I think, and written down the,
essentially the attestation clause and they had-had the two witnesses plus themselves
sign in that clause, which was fine, except they didn't have the self-proving affidavit.
Well, they had gotten this will signed--I kid you not--at the local Ford dealership.
The two witnesses to the will were two employees at the Ford dealership; one of them was a
receptionist and one of them worked in the finance office. Why they agreed to be witnesses
to the will, I don't have any idea.
Well, we had to subpoena them to court in order to prove the will and so the one young
lady happened to still live in town and so we found her relatively easily even though
she did not work at the Ford dealership anymore. The other one we found, she did still live
in the general county where the dealership was located but she spent six months of the
year in Pennsylvania.
Meador: Oh goody.
Peterson: We ended up having to subpoena her from Pennsylvania. She told us . . . we had
to set the probate here and basically around the holidays which is a very hard time to
have a court hearing by the way but we had to get her to agree to fly back from Pennsylvania.
The moment she stepped off the plane in Texas, because we didn't really have subpoena power
in Pennsylvania to be honest with you, but once she stepped of the plane in Intercontinental
we had processed over the server with the subpoena to show up the hearing.
But those are the kinds of things that happen if you don't have this self-proving affidavit
on there. So if you're reviewing somebody's will with them, those are the standard clauses
that you want to look for. And truthfully, if somebody asks you to kind of look over
their will as the financial planner, I would concentrate at looking at the will for the
distribution scheme and whether it fits with the financial plan and if you have any questions
whatsoever about the validity of the will, go call an attorney.
Meador: Absolutely, that's exactly right. Don't try their attorney.
Peterson: Don't try to go through your materials and say, "Well, does it have a residuary clause?"
"Does it have you know a self-proving affidavit?" I mean, if it's something that you notice,
let it be a red flag for you to pick up the phone and call somebody else.
Meador: Absolutely. So what are some of the other clauses that we might see in wills?
Peterson: So sometimes we will put into wills what's called a simultaneous death clause
so for a married couple we might say, "Well, if the husband dies . . . if the husband and
wife die together in a car accident, we are going to presume one or the other of them
dies first." And there are reasons to do that are probably more complex than what you are
ever going to need know but it's basically to effectuate other parts of the state plan
especially for high-net worth individuals.
Typically, we will have a survivorship clause so we will say, "Okay, well, we don't want
to get into simultaneous death situations or deaths where you know a son or daughter
survives the mom and dad only by an hour or two." We don't want to get into all of that
so what we are going to say is you're not a survivor unless you survive the decedent
by at least 30 days or 60 days or 90 days, and so it kinds clear up the situation where
an entire family passes away essentially in a single accident.
Sometimes it will have disclaimer notices in there where it is possible to refuse an
inheritance, so it will have something in there that allows you to refuse the inheritance
and make clear how that refusal needs to be communicated.
Contingent beneficiaries. So think of these as back-ups to the back-up, so you might have
like in my estate plan my wife is my primary beneficiary. Well, my contingent beneficiary,
so if my wife dies with me, doesn't survive me because she doesn't survive past 30 days,
or if she decides to disclaim the inheritance, then it would pass my contingent beneficiaries
who are my children.
Usually what we recommend to clients is they have a couple levels of contingent beneficiaries
so that the Aggie basketball team doesn't just go with five players, they got seven
more on the bench. You want to have some more on the bench for exactly that reason.
One of the things that we often see in wills and that we always put in wills is a no-contest
clause. If you want to go down and contest mom and dad's will at the probate court, we
want you to have skin in the game. We want you to have make a decision, we want you to
have something at risk, because ultimately what we want is we want mom or dad's wishes
followed. That's what they made the will in the first place.
And so what we want to do is disincentivize you from going down and challenging the will
and so the typical no-contest clause will say that if you file a will contest, then
you're presumed to not have survived so you have lost whatever is given to you in the
will. So you want to do that.
The other one that we typically see is what's called a contingent trust. Remember we talked
before a little bit about when we were talking about beneficiary designations, we talked
about do not list minor beneficiaries.
Meador: Right.
Peterson: Okay. So typically, one of the contingent beneficiaries will be kind of catch-all like
my heirs at law. So if you look at my will, you would see my wife is the first choice,
and my kids are the second choice, and then you would see our heirs at law as kind of
the ultimate back-up. Well, it is possible that one of those heirs at law could be my
niece, Marilyn Grace who is three. Well, she's three, she's a minor, right? So how are we
going to deal with a minor beneficiary?
Now we are going to talk about minor beneficiaries later on but one of the cleanest to do it
is to put a contingent trust in the will that says anyone who is under a certain age, whatever
they inherit my estate, is going to go into a trust for their benefit until they hit a
certain milestone. So typically, in our office what we do is we will make the contingent
trust anybody who is under age 25 who inherits, we are going to put into a trust for their
benefit until they hit age 25, and then when they hit age 25, then they will get a check
for whatever is left in the trust at the time.
Meador: That's good.
Peterson: So like I said, I firmly believe that young adults' brains aren't fully formed
until at least they graduate from college, or in my case I was not . . . yeah.
Meador: Yeah, I was living proof of that statement. We're not going to go there.
Peterson: So it's good to have that back-up trust in place for contingencies.