Estate Planning Decisions About Property

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In developing an estate plan, you will need to make a number of decisions about your property. Before you begin, you should take an inventory of your property that will help you and your attorney develop your estate plan. You may use the Financial Data Questionnaire to help you with this task. After you have made your inventory, you are ready to think about the following questions. How do you own your property? What will be your spouse's share? If you have more than one beneficiary, how do you want your property divided? To bequest and devise Dividing property among children Dividing property among surviving children and grandchildren Physically dividing the property Do you want to give a beneficiary full or limited ownership rights? What happens if a beneficiary dies before you do?

How do you own your property?

The way you own your property affects how it is distributed at your death. Property owned with a right of survivorship automatically passes to the surviving co-owner or co-owners, regardless of what is written in your will. Learning how you own your property is essential to develop an appropriate estate plan. In some cases, it may be necessary to change the form of ownership to achieve the desired results. Deeds and other documents of title are the best source of information for determining how your own your property. For more information, see Property Ownership.

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What will be your spouse's share?

If you are married, your estate plan should take into account your spouse's share of your separately-owned property. Many couples simply make the surviving spouse the sole beneficiary under the will. For many estates, this plan works well and has an added advantage of simplifying probate. See, The Surviving Spouse.

In some situations, however, there are reasons why someone may want to give his or her spouse less than all of the estate.

• Unnecessary tax consequences may result for large estates if the surviving spouse inherits everything outright. If the value of both spouses' estates is greater than the amount sheltered by the applicable credit amount, ask your attorney about the soundness of leaving everything to your spouse or of owning everything with a right of survivorship.
• People who have had multiple marriages and children from a prior marriage may want to limit the share of the surviving spouse.

Whatever the reasons for limiting the surviving spouse's share, the planning must take into account the right of the surviving spouse to dissent from the will. Your surviving spouse may be entitled to a certain amount of your separately-owned property, regardless of what is in your will. Under North Carolina law, you cannot use your will to disinherit your spouse. Thus, your estate plan should take your spouse's rights into account.

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If you have more than one beneficiary, how do you want your property divided?

To bequest and devise. A bequest is a gift by will of personal property. A devise is a gift by will of real property (land). A general bequest or devise does not name specific items of personal property or specific parcels of land. A specific bequest or devise names specific items of personal property or specific parcels of land. "I give all of my personal property to ______________," is an example of a general bequest. "I give my diamond necklace to ________________," is an example of a specific bequest. "I give all my real property to ______________," is an example of a general devise. A specific devise of land should contain the legal description of the land.

A specific bequest or devise may need updating often as the listed items are sold, given away, damaged, lost, stolen, etc. A general bequest or devise simplifies the drafting of a will because the attorney need not spend time writing detailed descriptions of property. If you are paying your attorney by the hour, this could make a significant difference in the cost.

If you want to make specific bequests of personal property, you can put the list in your will, or you can have a list separate from your will. Because it is undesirable to have a will containing detailed provisions disposing of personal property item by item, many lawyers recommend using a separate list called a memorandum. For the memorandum to be legally enforceable in North Carolina, it must meet three requirements.

• The will must specifically refer to the memorandum.
• The will must refer to the memorandum as being in existence at the time the will is signed.
• The memorandum must in fact be in existence.

The memorandum should not be the only provision disposing of personal property. The will should contain a provision disposing of all personal property not covered by the memorandum. To change or update the memorandum, you must have a codicil (amendment) to your will referring to the new memorandum.

Dividing property among children. If you have children, you will need to decide how to divide your property among them. Many parents automatically divide their property equally among their children. There may be reasons, however, to divide the property unequally.

• Some children are less deserving than others.
• Some children are needier than others.
• Some children may have received their share during their lifetime.

This decision is a personal one that depends upon the facts and circumstances of your family. If you have a reason to give your children unequal shares, but you are afraid that your decision will be misinterpreted or will create friction between your children, discuss your decision and the reasons behind it with them. In an open and candid discussion, you may learn that your children agree with your decision, or that your suspicions of trouble are confirmed. In the latter case, you will have time to control the damage.

Dividing property among surviving children and grandchildren. If two or more of your children die before you, how do you want your property divided among your grandchildren? You have two options.

• Your grandchildren inherit the share of their deceased parent.
• Your grandchildren inherit an equal share of the combined shares of their deceased parents.

Consider the following situation.

Mother and Father have two children and four grandchildren. After Mother and Father pass away, the estate is to be divided equally between Son and Daughter. If Daughter predeceases them, Son will inherit half of the estate, and Daughter's three children will inherit her half of the estate. What happens if both Son and Daughter die before their parents?

Option 1. The grandchildren inherit their deceased parent's share. Assume the estate is valued at $300,000 after taxes and creditors have been paid. Andrew would inherit property valued at $150,000, and Bruce, Betty, and Brad each would inherit property valued at $50,000. [150,000 ÷ 3 = 50,000]

Option 2. The heirs of deceased children inherit equally. Add the shares of the deceased children (Son and Daughter) and divide the shares equally among their children. Andrew, Bruce, Betty, and Brad each would inherit property valued at $75,000. [300,000 ÷ 4 = 75,000]

The language in your will determines which option applies. The first option is routinely used in wills. If you would prefer the results of the second option, you should discuss it with your attorney. Ask your attorney to confirm that your will reflects whichever result you prefer.

Physically dividing the property. It is easier to divide some types of property than others. Cash is perhaps the easiest to divide. Land can be divided. But, how do you divide a diamond ring, Grandma's pearls, an antique desk, or the fine china? You can make specific bequests of these items, but suppose you have decided to make general bequests rather than trying to maintain a list. How will your executor divide your property? You can give your executor directions in your will and in a letter of last instruction. Here are some ideas, and your attorney may suggest additional options.

• Give your executor discretion to distribute your property. This option is often used in wills, but it may put a heavy burden on your executor and create ill will between your executor and your heirs.
• Direct your executor to sell your property and divide the cash between your heirs. You can make special provisions for family heirlooms that you want kept in the family.
• Direct your executor to hold a lottery among your heirs for specific items. While some heirs may be disappointed if they don't draw the items they want, they have only Lady Luck to blame rather than other family members.

Deciding who gets what can be a difficult exercise, especially when you know that more than one person desires a particular object. The Cooperative Extension Service of Minnesota has developed a program entitled, "Who Gets Grandma's Yellow Pie Plate?" to help families work through these difficult decisions. This program is offered through the North Carolina Cooperative Extension Service. Check with your local county center for more information.

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Do you want to give a beneficiary full or limited ownership rights?

If a beneficiary inherits your property outright, he or she can sell it, give it away, or squander it. Full ownership rights entitle a beneficiary to do whatever he or she wants with the property within the bounds of the law. However, you may choose to limit the beneficiary's rights in the property. Here are some reasons why you might consider this option.

• You are concerned that your spouse will remarry, and you want to preserve your assets for your children.
• You are concerned that your child will die before his or her spouse, and you want to preserve assets for your grandchildren.
• The beneficiary is unable to manage property, and you are concerned that the inheritance will be squandered.

Example 1. Husband and Wife have three children. Husband owns and operates a small business which is very successful and makes a fortune. Husband and Wife have wills that leave everything to the other if he or she survives, and if not, then to their children. Husband dies, and Wife inherits the fortune outright. She remarries a man with children from a prior marriage. Wife and Husband #2 go to their lawyer for wills that leave everything to the other if he or she survives, and if not, then to their respective children. Wife dies first, and Husband #2 inherits the fortune. When he dies, his children inherit the fortune through his will. The children of Husband #1 inherit nothing.

Example 2. Mother and Father have one child, Danny. Their wills leave everything to the other if he or she survives, and if not, then to their son. Danny inherits their property after they both pass away. Danny's will leaves everything to his spouse, if she survives him, and if not, then to his children. Danny dies, and his wife (Mother and Father's daughter-in-law) inherits Mother and Father's property through Danny's will. She remarries, and her will leaves everything to her second husband. She dies, and her second husband inherits Mother and Father's property. Mother and Father's grandchildren inherit nothing.

These examples illustrate only two reasons why someone might want to put limits on the ownership rights of a beneficiary. There may be other reasons, and you should discuss this issue with your attorney if you are concerned about giving a beneficiary outright ownership.

What are the alternatives to outright ownership? Here are two of the most often used options. Your attorney may have other suggestions more suitable to your situation.

• Put the property in trust. The trustee has the right to control the property, and the trust terms determine who gets the property.
• Give the beneficiary a life estate in the property. The beneficiary has the right to use and possess the property for his or her lifetime. At the life tenant's death, the property automatically goes to the remaindermen.

A trust is more flexible than a life estate and is the preferred option in most cases.

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What happens if a beneficiary dies before you do?

Your estate plan should cover the possibility that you may outlive some or all of your beneficiaries. In the event a beneficiary dies before you, how do you want the deceased beneficiary's share distributed? You have several options to discuss with your attorney.

• You can make no provision and allow the property to pass either under the residuary clause^[1] of your will or as if you had died without a will.
• You can name another person to inherit in the place of the deceased beneficiary.
• You can allow the heirs of the deceased beneficiary to inherit. This option is commonly used in estate plans, but may be undesirable if the beneficiary is unrelated to you. For example, if your will makes a bequest to a dear friend who dies before you do, you would probably prefer that the bequest go to your heirs rather than your friend's heirs.

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Endnotes

1. A residuary clause is the part of a will that disposes of property not expressly disposed of by other provisions in the will. [Return to text.]

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Prepared by Carol A. Schwab, J.D., LL.M.,
Professor and Extension Specialist, NC State University.

This publication is provided as a public service and is designed to acquaint you with certain legal issues and concerns. It is not designed as a substitute for legal advice, nor does it tell you everything you may need to know about this subject. Future changes in the law cannot be predicted, and statements in this publication are based solely on the laws of North Carolina in force on the date of publication.

Date: May 2000