The Pit Falls of Dying Without Proper Esate Planning in Kentucky

Ted HutchinsFive Good Reasons to Prepare a Will

Many people fail to prepare even a basic will, despite the fact that they are uncertain of the consequences of dying without one. Following are five good reasons for every Kentuckian to draft a will.

1) Designate Beneficiaries and the Manner in Which They Are to Receive Your Property.

A will allows you to designate the person or persons (“BENEFICIARIES”) who will receive your property upon death. The property of a person who dies without a will is distributed pursuant to rigid, complex formulas. For example, an unmarried person’s estate will pass to his or her surviving children and their descendants. If there are no descendants, the estate will pass to the decedent’s parents, or if they are deceased, the decedent’s surviving brothers and sisters and their descendants and so forth. To further complicate the matter, if the decedent was married at the time of death, then the surviving spouse will be entitled to one-half of the decedent’s property.

These rules of distribution may be avoided through the use of a will. In Kentucky, a resident is generally free to provide for the distribution of his property to any person or persons. When gifts are made to a beneficiary by will, they are said to be “TESTAMENTARY.” A testamentary gift may be made “outright” or “in trust.” If a gift of property is made outright, the beneficiary will have immediate rights to the property.

Gifts of property which are made in trust are held by a third party (A “TRUSTEE”) for the beneficiary until a later date.¹ Gifts in trust are recommended when a beneficiary is young or disabled. Parents of a young child are well advised to create a will that includes a trust that holds property until the child is older and more responsible.

2) Designate Your Executor.

A person who signs a valid will in Kentucky may designate an “EXECUTOR.” The executor is a person named in a will who oversees the administration of an estate. Under Kentucky law, any Kentucky resident over the age of 18 years may serve as an executor. In addition, any nonresident who was related to the decedent by blood, adoption, or marriage may also serve as executor of an estate. Banks and trust companies incorporated under the laws of Kentucky are also eligible to serve as an executor.

Those persons who fail to have a will when they die leave it again to Kentucky statutory law to determine who is entitled to oversee the administration of the estate. Kentucky law gives priority to the decedent’s surviving spouse, if any, and then to children and more remote relatives. However, if no relative applies for administration within 60 days, any person, even a creditor of the decedent, may apply to oversee the administration of the estate.

3) Designate Guardian for Minor Children.

Persons with minor children (children under the age of 18) have an extra reason for having a will in Kentucky. Kentucky courts will recognize and give effect to a parent’s choice of guardian contained in a will. On the other hand, if the surviving parent dies without a will, the family court or other court will have to use the information presented and available to it in determining what to do with the children. A court will consider the evidence presented by family members and social agencies in determining with whom to place the custody of the children. Of course, if there are surviving family members of both parents, conflicts may arise. Therefore, it is wise to utilize the statutory power to nominate the guardian of surviving children through the use of a will.

4) Avoid Surety Expense.

KRS 62.060 provides that every executor must enter into a covenant, or bond, with the Commonwealth of Kentucky, insuring that he or she will faithfully execute the duties as executor. The bond is set in a penal sum, and if the bond is broken, the executor may be sued. The law further provides that the executor must provide a “SURETY” on the bond. The expense of a corporate surety can be substantial because the surety is required to verify having a net worth of double the penal sum of the bond.

There is, however, an exception to the rule. KRS 395.130 states that a court may excuse “the requirement of a surety . . . (if ) by the terms of the will or trust, a surety is not required.” Therefore, one may waive the surety requirement by stating that the executor be relieved of this obligation in the will.

5) Address Federal Estate Tax Issues.

The federal estate tax is applied against the property of a decedent which is transferred upon death. Fortunately, there is a rather large tax credit which permits a decedent to transfer the first $1.5 million to his or her designated beneficiaries free and clear of the estate tax.² For those persons who own property in excess of that covered by the credit, the estate tax is a serious concern. Currently, for property in excess of $1.5 million, the tax rate begins at 45% and increases to 48% for property over $2 million.

A will may be utilized to make sure that married couples take full advantage of the estate tax credit. For example, married couples often make the mistake of having simple wills which leave all property outright to the surviving spouse. This is bad tax planning because the surviving spouse only gets the benefit of his or her tax credit. The surviving spouse is not permitted to use the decedent spouse’s tax credit, even though none of it may have been used. This can result is a large estate tax being due on the death of the surviving spouse when the property is passed to the children or other heirs.

The estate tax laws, however, permit married persons to shelter the first spouse’s property from the estate tax through the use of a trust and still allow the surviving spouse to have some control and benefit from the property. This sort of trust is generally referred to as a “CREDIT SHELTER TRUST,” and it may be created in a properly drafted will. A credit shelter trust generally provides that the surviving spouse receives all of the income produced by the property of the trust. Perhaps best of all, the property held by the credit shelter trust may ultimately pass to the children of the decedent free of the estate tax.

In Conclusion

Obviously, the circumstances of each individual or family situation are unique. It is recommended that Kentucky residents contemplating estate planning meet with a competent lawyer for advice as to which documents may be appropriate to meet their particular goals

¹ There is one notable exception to this rule. Unless there is a prenuptial agreement in place whereby the spouses have waived their dower rights, a surviving spouse has a statutory right to a portion of the decedent’s property regardless of whether the decedent had a will.
² The tax credit is scheduled to increase to cover $2 million in 2006 and $3.5 million in 2009. Under current law, the estate tax will be repealed in 2010, but reinstated in 2011 with a tax credit of only $1 million.