A Tax Credit for Wills
This article originally appeared in the July 12, 2021, issue of Tax Notes Federal.]
Margaret Ryznar is a professor of law at Indiana University McKinney School of Law.
In this article, Ryznar suggests using tax law to encourage people to execute wills, arguing that the coronavirus pandemic revealed the importance of estate planning.
Copyright 2021 Margaret Ryznar.
All rights reserved.
The COVID-19 pandemic revealed certain problems in American society, including a systemic lack of estate planning, which Americans have a long history of neglecting. The reasons may vary. For example, many people — not expecting a pandemic — want to avoid confronting their mortality or think they have years to do it. Others simply never execute a will, letting the default state law determine their estate distribution. While default laws can reflect the property disposition a person wanted, sometimes they do not. For example, a person may want to benefit a charity to some extent, but this cannot be accomplished by default intestacy laws.
Not only do too few people have wills, but it is logistically difficult to get them in circumstances such as a pandemic. The will execution ceremony requires several people to gather together to witness the will, which is difficult when a contagious respiratory virus is circulating. Yet, a pandemic only heightens the importance of having a will and healthcare power of attorney, given the health risk that pandemics pose. Further, while parents of minors may have a comparatively low mortality because of their age, they should appoint guardians for their children in their wills. For these reasons, many doctors and nurses were scrambling to prepare their estate documents at the onset of the pandemic.1 Not only is this a stressful situation logistically, but it also would be beneficial to make significant decisions such as estate plans with a calmer mind. Other circumstances that make executing a will difficult include loss of mental capacity to make one or an accident before being able to execute it.
This problem can be addressed by (1) reducing or eliminating will formalities to make will execution easier or by (2) encouraging the creation of wills while people have the capacity to do so. The first method is reactive, while the second is proactive. There are many benefits to taking a proactive strategy and incentivizing wills, as well as doing so through the tax code.
Eliminating Necessary Will Formalities
Will formalities, which have been a part of trusts and estates law for centuries, stem from the Wills Act (1837) enacted by the United Kingdom Parliament.2 Under this act, a will was only valid if:
it was made in writing;
it was signed by the testator or at his direction and in his presence;
the testator intended that the signature give effect to the will;
the will was made or acknowledged in the presence of two or more witnesses; and
each witness signed in the presence of the testator.
The Uniform Probate Code on which many state probate codes are based has adopted the Wills Act requirements. A notary was eventually allowed to substitute for witnesses.
Each state has different requirements for will formalities, often based on the Uniform Probate Code, but generally there are three requirements:
witnesses must attest to the will;
the testator must sign the will; and
in some states, there must be a writing.
The goal of these formalities is to ensure that the will is authentic to give full effect to the testator’s intent.
A few states allow nuncupative wills, made orally, under very limited circumstances. For example, in Indiana a nuncupative will may be made only by a person in imminent peril of death who died as a result of that particular peril.3 It must be declared before two disinterested witnesses, one of whom must then write it down within 30 days. Finally, and most problematically, it can only dispose of personal property worth up to $1,000 except for those in active duty military service.
There are several functions of will formalities. The evidentiary function of formalities supplies satisfactory evidence to the court that this is the testator’s will. The ritual/cautionary function entails a ceremony to impress upon the testator the significance of his statements. The protective function safeguards the testator’s intent. Finally, the channeling function simplifies administration.4
Will formalities aim to guarantee the will’s authenticity to give effect to the testator’s intent. This protection of the testator’s intent is a guiding principle in wills law. If a will fails to meet even one of the statutory formalities, then a will contest may be brought.
Will contests are complex. On one hand, they could vindicate the testator’s intent by revealing undue influence or fraud. On the other hand, they could lack merit and serve as personal vendettas for the disinherited. To the extent that will contests undermine the testator’s intent by invalidating the will, it is best to avoid will contests. Therefore, it is important to meet all the will formalities when executing a will.
However, state courts have started to recognize curative doctrines, such as the harmless error rule and the doctrine of substantial compliance. These doctrines reduce the costs of mistaken omissions of testamentary formalities by allowing those wills to be probated under some circumstances. Some states have eased these required will formalities to permit holographic wills, which are handwritten by the testator and do not need attestation by witnesses. During the pandemic in 2020, some states even permitted remote online notarization or witnessing for some documents.5
Nonetheless, most people will need to execute a will with appropriate formalities.6 A massive change in trusts and estates law would be needed to abandon these formalities. In the meantime, the execution of a will typically requires a gathering of the testator, witnesses and, often, lawyers.
Providing Incentives for Wills
Tax law is far more dynamic than trusts and estates law, changing every year and allowing for quicker updates. Further, tax law can accomplish change at the federal level, unlike trusts and estates law, which typically must be changed at the state level. Finally, financial incentives are useful, and tax law is particularly effective for incentivizing actions.
One option to encourage people through tax law to execute wills is providing a tax credit. A tax credit is simple to administer as well as easy to understand and calculate for taxpayers. One model on which to base this credit is the federal first-time homebuyer tax credit, which was established as a response to the 2008 financial crisis.7
The tax credit to incentivize estate planning would offset the costs of making a will or trust. Costs are often incurred from either hiring a lawyer to draft estate planning documents or from purchasing forms to create documents oneself.
A tax incentive in the form of a credit would be compelling for several reasons. First, it would remind people to execute a will each year they do their taxes. Second, it would encourage them to seek professional help to do so. Executing one’s own will is difficult given the many nuanced rules in trusts and estates law, including the will formalities, without which a will is invalid.
To minimize the costs of such a tax incentive, it can be phased out for higher incomes. Given the tax and other benefits to estate planning, it is likely that those with higher income levels already have enough incentive to make an estate plan.8
Finally, the tax incentive need not cover the full cost of estate planning. A tax incentive worth $50 may be enough to nudge people into creating an estate plan.9 It can further be limited to first-time estate planning for only a specific number of years. Estate planning is not a tradition for many American families, but a nudge could help make it so.
When the pandemic eases, many resulting issues will need to be addressed. One of these is preparation for the next pandemic, which should include encouraging people to create an estate plan. There are many benefits to achieving this goal through tax law rather than trusts and estates law, which makes tax incentives worth considering before the onset of another wave of COVID-19 or another pandemic.
1 Rachel Siegel, “As They Rush to Save Lives, Health Care Workers Are Updating Their Own Wills and Funeral Plans,” The Washington Post, Mar. 26, 2020.
2 Wills Act (1837) (United Kingdom).
3 Indiana Code 29-1-5-4.
4 Jesse Dukeminier and Robert H. Sitkoff, Wills, Trusts, and Estates 144 (2017).
5 Kerry Hannon, “Estate Planning in the Time of the Coronavirus Pandemic,” AARP (Apr. 29, 2020).
6 Natalie M. Banta, “Electronic Wills and Digital Assets: Reassessing Formality in the Digital Age,” 71 Baylor L. Rev. 547 (2019) (noting that wills are one of the last holdouts against the digital revolution).
7 Section 36.
8 See, e.g., Jonathan G. Blattmachr, Georgiana J. Slade, and Bridget J. Crawford, “Estate Planning for Persons With Less Than $5 Million,” 34 Est. Plan. 18, 23 (Mar. 2007).
9 A nudge “is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness 6 (2009).