Testamentary Documents


Business and Estate planning involves instituting a careful program of legal documents which may range from merely executing a simple will to preparing and executing several inter-related legal documents which may be modified over time. Since the terminology may tend to be confusing to those who are investigating preparing a business and/or estate plan, it is the purpose of this listing to identify briefly the type of legal documents which may be available and to highlight their purpose. The comments which follow are general in nature and are intended as guidance, rather than a legal opinion on applicability to a particular situation. There are some variations among state laws, and laws affecting all of these documents are subject to change.

I. DOCUMENTS WHICH TAKE EFFECT DURING LIFETIME. Certain documents, some of which are directed primarily toward estate planning, nevertheless are effective during a person's lifetime.

A. POWER OF ATTORNEY. A Power of Attorney is a written authorization enabling another to take action on behalf of the "grantor" of the power, just as if the grantor were taking the action himself. The Power can either be "durable" (surviving the incapacity of the grantor) or terminate at such time as the grantor becomes unable to manage his/her affairs. The Power always must terminate at death. It is almost always revocable by the grantor (if competent); under most circumstances it must be notarized.

B. LIVING WILL. A Living Will is a document signed by an individual to set forth the instructions which he/she wishes to be carried out in the event of his/her inability to make medical decisions under circumstances in which the individual does not wish heroic or other specified measures undertaken to prolong life. This is basically an informal document, not always effective, and for the most part replaced by the Durable Medical Power of Attorney.

C. MEDICAL POWER OF ATTORNEY. This has the same purpose as the "Living Will," although it is much more effective, comprehensive and formal to meet the standards required in many jurisdictions. This document, however, like many others, has been developed and changed as case law and statutes modify the requirements for validity.

D. LIVING TRUST. A Living Trust (also known as "inter vivos" trust) is a contract entered into between a "Grantor" (the person establishing and perhaps funding the trust) and one or more Trustee(s). This contract must also provide who is to be the "beneficiary" of the Trust, both immediately and in the future. The beneficiary may be the Grantor, member(s) of his/her family, or others. Trusts can be very simple, involving little more than the agreement and a bank account, or more elaborate, providing for various beneficial interests of many people or charities for generations.
Any trust may consist of one or more "life estates" (for the life of the beneficiary), with a "remainder" interest passing to another specified person.

1. PURPOSES OF A LIVING TRUST. Living Trusts may be established for a variety of reasons, including the following. Property held in a living trust which directs how it is to be distributed at the Grantor's death does not go through "Probate" (court supervised administration of an estate), which avoids the expense, delay and public disclosure of a person's estate. A Living Trust may also protect the assets of a Grantor from inappropriate influence of others, either family members or third parties. Further, a Living Trust enables a Grantor to use the financial investment services of a professional Trustee in circumstances in which they are warranted. Living Trusts can be used to extend potential benefits to disabled or financially unsophisticated individuals without necessarily parting with assets completely.

Also, certain types of Trusts exist primarily for purposes of tax benefits. As noted below, Trusts can also be set up by Last Will and Testament ("Testamentary Trusts") which can accomplish some, but not all, of the objectives of a Living Trust.

2. KINDS OF LIVING TRUSTS. Living Trusts have been categorized in various ways which are based upon the basic terms of the Trust or the purpose for establishing the Trust in the first instance.

a. REVOCABLE LIVING TRUST. A Revocable Living Trust is a Trust contract in which the Grantor reserves the right to revoke or substantially modify the Trust at his/her own discretion. This type of trust provides maximum flexibility, while at the same time providing a benefit, such as avoidance of probate. This type of Trust does not, however, generally provide any tax advantages.

b. IRREVOCABLE LIVING TRUST. An Irrevocable Living Trust is established in such a way that the Grantor cannot revoke or alter the Trust once it is created. The Grantor's irrevocably parting of control is an important element in effectuating the purpose of the trust, which may be to make a gift or other transfer, or may have an income tax purpose such as transferring ownership for purposes of taxability, or may create a charitable deduction. An irrevocable Trust can also transfer to another the tax basis of the Grantor, so that future appreciation will not be included in the Grantor's Estate.

c. SPECIAL TRUST NAMES. Certain types of Trusts have been labeled with unusual names, generally resulting from the law or case which authorized them.

(1) STAND BY TRUST. This is a Trust which is initially nominally funded and is designed to receive property at a later time, such as through life insurance or upon a future contingency.

(2) "CRUMMEY" TRUST. This Trust is used to transfer future interest property to a beneficiary through a series of annual gifts which qualify for the annual gift tax exclusion.

(3) GRANTOR'S TRUST. This is a Trust established and administered by a Grantor which has a separate legal existence, but doesn't shift tax liability from the Grantor.

(4) GRANTOR RESERVED INCOME TRUST ("GRIT"). A GRIT is a method of shifting the value of residential real estate by using a trust for years, while retaining the right to current possession.

(5) CHARITABLE REMAINDER UNI-TRUST. This Trust is used to obtain a current income tax deduction by transferring a future interest in assets to a charity.

(6) CHARITABLE LEAD TRUST. This is another charitable deduction maneuver with an up front payment to charity.

(7) MARITAL DEDUCTION TRUST. This is a standard type of Trust which is designed to take maximum advantage of the unified Gift and Estate Tax credit of a married couple.

(8) Q-TIP TRUST. A Q-TIP Trust is a mechanism which enables assets to qualify for a marital deduction, while simultaneously retaining for the first spouse to die the right to specify disposition of the assets at the death of the second.

(9) REMAINDER TRUST. A Remainder Trust is usually that portion of an Estate which continues in Trust for family members after a Marital Trust or similar Trust is first carved out.

(10) POUR OVER TRUST. A Pour Over Trust directs the transfer of assets into another Trust upon the happening of a certain event, such as the death of a beneficiary.

(11) SPRINKLING TRUST. A Sprinkling Trust gives discretion to the Trustee to distribute income or principal among various beneficiaries in accordance with standards set forth in the Trust document.

E. RESTRICTIVE AGREEMENTS. Restrictive Agreements are mutually enforceable contracts entered into between partners, shareholders of a closely held corporation, or others in a special relationship, to restrict transferability of a business interest. The reasons may involve significant lifetime purposes, such as a desire to control the identity of those with whom one is in business, as well as ultimate disposition at death, or issues of valuation.

II. TESTAMENTARY DOCUMENTS. Other legal documents, which may have been inoperable during lifetime, become effective at death.

A. LAST WILL AND TESTAMENT. A person's Last Will and Testament is the document which permits each individual to direct where his/her assets are to be distributed at death, after payment of his debts and last expenses. Without a Last Will and Testament, assets are distributed in accordance with a state invoked statutory schedule which may not coincide with the individual's wishes. This is called "intestacy." One who dies with a will is said to die "testate." Even if the intestate distribution schedule coincides with the individual's desires, a Will gives the person the authority to determine who will be guardian of minor children and who will act as Personal Representative ("executor)" of the Probate Estate. A Last Will and Testament actually operates in conjunction with other methods of transferring property at death, and is effective generally only with respect to property individually owned by the decedent at death (or over which he/she has a Power of Appointment). Until death, an individual may generally revoke or amend his/her Will at any time, provided he/she is competent and the requisite formalities of execution are followed. The manner in which distribution is made differs in accordance with the way in which a will is written.

1. OUTRIGHT DISTRIBUTION. A Will may provide for the outright distribution of assets to one or more individuals in whatever shares are specified in the Will.

2. TESTAMENTARY TRUSTS. A Will may transfer assets in whole or in part to Trusts which are created by the Will itself, and therefore only come into existence at death. While not available to avoid probate, a "Testamentary Trust" is useful as a tax planning tool to take advantage of certain tax exemptions which are available between married couples, to postpone outright ownership of assets in minors, to allow assets to be made available for the benefit of a group of individuals to satisfy needs (e.g. educational, medical) which may not be known until sometime in the future, or to protect assets from dissipation by fiscal mismanagement or unforeseen events. Therefore, Testamentary Trusts may have significant tax implications, practical effects, or both.

B. CODICIL. A Codicil is simply a formal amendment to the terms of a Will, usually prepared to address only a minor modification or change in circumstance.

C. POUR-OVER WILL. A Pour-Over Will directs distribution of assets of a decedent to be administered by a Trust, usually an inter vivos trust previously established by the testator.

D. LIVING TRUSTS. Living Trusts are again discussed here not because they are first operational at death, but because death may significantly affect the legal status and administration of the Trust. (E.g., a revocable Trust becomes Irrevocable; a Trust may become subject to distribution at death.)

E. FORM OF OWNERSHIP. In preparing an Estate or Business plan, it is important to remember that even with a well designed Will and other documents, the Form of Ownership of assets may impact upon whether the Will or Trust will achieve its desired benefit. No matter how carefully crafted a will might be written to avoid taxes or accomplish a particular distribution scheme, if all assets are held as joint tenants with right of survivorship, the surviving joint tenant becomes the sole owner, regardless of what the Will says.

Sometimes, a well constructed Estate plan uses Jointly Owned property as part of the plan; sometimes Joint Ownership defeats the effort.

F. OTHER CONTRACTS. Certain property passes at death not by operation of a Will and not by Form of Ownership, but rather by operation of a written contract or agreement. Examples of this are insurance policies which designate an individual as beneficiary, or pension or other benefit plans which do the same.

G. BUY-SELL AGREEMENTS. Restrictive Agreements, discussed above, may contain a provision requiring the purchase/sale or redemption of corporate stock or other closely held interests at the time of death, either at a previously set or a specifically determinable price.

H. POWER OF APPOINTMENT. A Power of Appointment is a specialized Estate planning device in which one individual empowers another individual to appoint who is to receive designated assets originally belonging to the first individual. Although the Power may be exercisable otherwise, it is usually to be exercised in an individual's Last Will and Testament. The Power to Appoint may be unlimited, or may be restricted among a group of individuals. Thus, for example, a Mother may give her Son a Power of Appointment to be exercised among her grandchildren, thereby postponing final decision on the ultimate share of distribution until the Son's presumably later death, at which time, he may appoint by his Will, based, e.g., upon the relative needs of the grandchildren.

III. TAX ISSUES. Tax issues may be extremely important factors in individual Estate and Business Planning situations, or they may only be incidental to the needs of the individuals involved. The following areas of tax planning should be addressed, at least initially.

A. INCOME TAXES. The use of Trusts and other planning devices may impact income taxes in several ways. They may be used to shift income from one person to another, or to postpone taxes. They may be used to obtain the benefit of charitable deductions. Capital gains taxes may be affected by a step-up in basis relating to the basis of property received from an estate due to the current laws setting basis at fair market value at date of death.

B. ESTATE AND GIFT TAXES. A unified table of Estate and Gift taxes applies to property transferred by gift during lifetime and property passing at death. Although skillful planning may significantly reduce the amount of tax, the marginal rates are considerable once exemptions and credits are used up. Careful planning takes advantage of both annual exclusions available for gifts as well as unified credits available to all taxpayers. Valuation issues and Buy-Sell agreements can be particularly important in limiting taxes.

IV. "POST MORTEM" ESTATE PLANNING. Although most planning opportunities are lost if not implemented during lifetime, there are some options which surviving beneficiaries have to reduce taxes or modify the effects of an undesirable Estate plan, provided the survivors follow very technical rules in taking action after the death of a loved one.


A. DISCLAIMER. Under specific and limited circumstances, a beneficiary can "Disclaim" and refuse to accept property willed to him/her as if he/she had predeceased the decedent, with the result of the property passing to someone else in the family.

B. ELECTION AGAINST THE WILL. A spouse generally has the right to refuse to accept what is left to him/her under a Will, and instead receive a portion of an Estate specified by statute.

C. Q-TIP ELECTION. In order for a Q-TIP Trust to qualify for preferential tax treatment, a specific election to do so has to be made.

D. PARTNERSHIP "754 ELECTION". This is an election available to members of a Partnership to enable them to receive the benefit of a step-up in basis for capital gains purposes.


A well-coordinated estate and business plan can save considerable expense, both in the form of taxes and costs related to probate or other estate related activity. Of equal or greater importance, proper planning will save beneficiaries and loved ones from the delay, frustration, disputes and aggravation that can, but need not, be present in probate and estate management. A planning vehicle which is not appropriate at one time in one's career or life may become an ideal solution as circumstances change. We are available to consult with you and explain the benefits of alternative planning programs