Trusts and Wills often provide that a particular asset pass to a certain beneficiary. Such a bequest is a “specific bequest” in that it is satisfied only by receipt by the beneficiary of the specific, particular property identified in the Trust and Will. For example, a person leaves “100 shares of my Apple, Inc. stock to my daughter, Kathryn.” What happens if at the time of death, the decedent or his or her Trust no longer owns any Apple stock? Generally speaking, if specifically bequeathed property, such as the Apple stock in this example, is not in the decedent’s Trust or estate at the time of death, the bequest is adeemed, the bequest fails and the beneficiary receives nothing. This is known as “ademption”, namely the failure of a bequest because the property is no longer in the decedent’s Trust or estate at the time of his or her death. In this example, Kathryn would receive nothing. It is essential that if the decedent does not wish the bequest to adeem, the Trust or Will must clearly indicate this intent. An example of such stated intent would be:
“In the event I no longer own any shares of Apple, Inc. at the time of my death, this bequest shall not adeem but my daughter, Kathryn, shall receive in cash an amount equal to the closing value of 100 shares of Apple, Inc. as of the date of my death or as of the most recent trading day preceding my death.”
Other questions could arise even with the inclusion of the above language. For example, what if Apple, Inc. or its assets are acquired by a separate corporation prior to the date of death in such a fashion that the corporate entity Apple, Inc. no longer is in existence on the date of death? Does the bequest then adeem, or does Kathryn receive in cash an amount equal to 100 shares of the corporation that acquired Apple or its assets? Again, the Trust or Will needs to clearly state the intent of the decedent in the event of such contingencies.
Contrast this with a general bequest of a specific dollar amount such as where the Trust or Will provides for a bequest of “Thirty-five Thousand Dollars ($35,000.00) to my daughter, Kathryn.” In this latter situation, it makes no difference whether the decedent still owns any Apple stock or not as the general bequest of Thirty-five Thousand Dollars ($35,000.00) to Kathryn will be satisfied out of the cash or liquid assets of the Trust or Estate or by the sale of other general assets of the Trust or Estate. However, although Kathryn would receive the general bequest of Thirty-five Thousand Dollars ($35,000.00), she would not share in any appreciation (or depreciation) in the value of Apple, Inc.
Accordingly, it is important that an estate planner insure that the client fully understands the pros and cons of providing for a specific or a general bequest. It is most important that the client’s Trust and Will clearly state his or her intent so that such wishes and desires are not defeated by future events arising after the Trust and Will is executed but prior to the date of death.
The following posting is borrowed from the May 2011 issue of Vegas PBS Source Magazine:
“It can seem daunting when beginning the process of making out a last will & testament, revocable trust, and powers of attorney. As one starts down this important, yet often intimidating course, increasingly people are wondering if they can do it themselves or should they use an attorney. Here are the top 5 reasons why you should use an attorney:
1. Experience. An attorney experienced in estate planning can tell you what to expect in terms of timelines, costs, taxes, and family issues that could arise.
2. Objectivity. On your own, it can be almost impossible to remain objective since estate planning decisions are so fraught with emotion.
3. Special skill. Estate planning specialists are specially trained in what they do. They understand important legal nuances and are able to bring together complex federal and state laws to make your plan work.
4. Protection. Doing it yourself, often leads to the payment of higher taxes, expensive probate proceedings, litigation and fighting between heirs, and increased opportunities for creditors attack. Don’t be “penny wise and pound foolish.”
5. Peace of mind. Knowing your financial affairs will be handled correctly leads to a profound sense of “inner peace.”
Last week, I prepared and gave a presentation to the Financial Planning Association of Nevada on some of the details of the 2010 Tax Act and its impact on estate planning. One interesting thing that I came across in preparing my presentation was a comparison of an estate relying on the new portability provisions versus utilizing an “A-B”, “Bypass”, or “Credit Shelter trust. “
The assumptions are as follows:
• Married Couple with a $10 Million estate
• Husband dies in 2011
• Wife dies in 2019
• 2% rate of inflation
• 5% return on assets
The original source of the chart and calculations may be found here on page 40-42.
This example shows the power of capturing the appreciation of the assets in the credit shelter trust. Of course, various factors could affect the calculations, including inflation rate, changes in the Capital Gains rate, and an assumption that the Estate Tax rate will remain at 35%.
Nevada, like most states, permits a person’s Last Will And Testament and Trust to refer to a separate, written statement or list to dispose of “tangible personal property” not otherwise specifically disposed of by the terms of the Last Will And Testament or Trust. In this regard, the question often asked is “What is tangible personal property that can be disposed of by such a written statement or list?” The applicable Nevada statute attempts to answer such question by defining certain tangible personal property that cannot be disposed of by such a written statement or list, namely “money, evidences of indebtedness, documents of title, securities and property used in a trade or business.” NRS 133.045. Accordingly, a person should never attempt to dispose of “money, evidences of indebtedness, documents of title, securities and property used in a trade or business” via a written statement or list. Examples of these items are cash, financial accounts, promissory notes, deeds of trust-mortgages, stocks, bonds and real estate.
Common examples of tangible personal property that can be disposed of by such a written statement or list are furniture, furnishings, rugs, pictures, books, silver, linen, china, glassware-crystal, objects of art, wearing apparel, jewelry and guns. One of the most common examples of property disposed of by a written statement or list is the wedding and engagement rings of the testator passing to a particular daughter or granddaughter.
Some of the advantages of using such a written statement or list are that it can be prepared before or after the execution of the Last Will And Testament and Trust, and it can be altered by the testator after the list has first been prepared. However, one must be careful to abide by the legal requirements of a valid written statement or list under Nevada law such as the statement or list must contain the date of its execution, the statement or list must contain a reference to the Last Will And Testament or Trust, et cetera.
The attorneys at Jeffrey Burr Ltd. have many years of experience in estate planning, and always inform clients of their option of disposing of part or all of their “tangible personal property” via a written statement or list. In the event a client wishes to utilize such a written statement or list, we insure that such statement or list is valid, enforceable, and carries out the wishes of the client.
Stupid question, right? Everyone knows what a trust is…or do they? Some people wrongly assume that a trust is an entity, like a corporation or limited liability company. While many states do recognize an organized business trust entity, the vast majority of trusts are not technically recognized as entities by the state. Simply stated, a trust is an agreement whereby property is held and administered by one person for the benefit of another.
There must be at least three parties to every trust agreement: the settlor, the trustee, and the beneficiary. The settlor is the person who forms the trust by contributing property to the trust agreement. Such property is known as the trust corpus or trust res. Sometimes a settlor is also referred to as a trustor, grantor, donor or creator. The trustee is the person who holds the trust corpus for the benefit of another. The beneficiary is the one for whom the trust corpus is held, and the one to whom distributions are made.
On a more academic level, a trust is created (or settled) when the title to property is split into two parts: legal title and beneficial title. Legal title refers to the ownership interest of a trustee. One who has legal title to property has the right to hold, possess, and deal with such property. Beneficial title, on the other hand, refers to the ownership interest of a beneficiary. One who has beneficial title has the right to enjoy the benefits of the property. Before the trust is ever formed, and title is thus bifurcated, the settlor will generally possess both legal and equitable title, or absolute title.
In common law jurisdictions, trust agreements are governed by the terms of the trust document, or trust indenture as they are sometimes called. The trustee is obligated to administer the trust in accordance with those terms as well as in accordance with governing law.
Common law trust doctrine first developed in the 12th and 13th centuries when landowners leaving England to fight in the Crusades would convey ownership of their land to a friend or family member, with the understanding that title would be conveyed back upon the Crusader’s return. Today, trusts are commonly used as testamentary devices (e.g., living trusts) or as tools to achieve one’s tax planning and asset protection objectives. Whatever a person’s legal needs may be with respect to property, it is almost certain that solutions can be found through the use of trust agreements.
Owners of large IRAs prior to the 2010 Tax Act generally had to decide between the income tax benefits of leaving the IRA to his or her spouse and the potential estate tax benefits of leaving some or all of the IRA to a credit shelter trust or a trust for children or grandchildren. Now, portability may allow owners of large IRAs to name the spouse as the beneficiary of the IRA while still preserving the owner’s unused estate tax exempt amount to be transferred to the surviving spouse.
Rules for IRAs with the Surviving Spouse as Beneficiary
When an inpidual with an IRA dies, leaving the surviving spouse as the beneficiary, the survivor has three options, all of which could have positive income tax results:
The problem with these options is that, if the survivor is the named beneficiary of the IRA, and the deceased spouse does not have sufficient assets to maximize his or her estate tax exemption, the exemption of the first spouse to die could be wasted.
Maximizing the exemption before the 2010 Tax Act
In order to avoid wasting the exemption, many couples were either naming another inpidual as a beneficiary of their IRAs, or they were leaving all or a portion of their IRAs to a credit-shelter trust in order to preserve the exemption of the first spouse to die.
A number of disadvantages and complexities arise when leaving an IRA to a trust, such as:
Another option would be to name the family trust as the primary beneficiary, allowing the survivor to disclaim the proceeds to a disclaimer trust at the first spouse’s death. However, the spouse would have to decide whether to give up the potential estate tax benefits of fully funding the credit shelter trust and disclaiming the IRA and giving up the income tax benefits of the spousal rollover. Additionally, the spouse would not be able to have any power of appointment over the disclaimer trust.
After the 2010 Tax Act
Now, with the 2010 Tax Act allowing for a $5 million exemption per person, the unused portion of which can be transferred to the surviving spouse, the problems set forth above may be largely solved. The IRA owner can name the spouse as the beneficiary, with all the income tax benefits which come with that option. Any amount of unused estate tax exemption will be transferred to the survivor to use upon his or her own death. Not only will this preserve the estate tax benefits which were only previously preserved by the methods outlined above, but the planning will also be simplified for owners of large IRAs who do not have sufficient other assets to fully fund a credit shelter trust.
As we know, portability is only in effect for 2011 and 2012. In the event that portability is not extended or made permanent, the other methods to preserve the first spouse’s exemption will have to be revisited. For the next two years, however, IRA owners without sufficient non retirement assets to fully utilize their estate tax exempt amounts should consider whether it would be desirable to name the spouse as beneficiary in light of the availability of portability.
There’s a funny commercial on TV lately. It involves a wealthy family gathering for a reading of the Will. If I recall correctly, most of the estate goes to the new (blonde and young) companion. But the only son of the Testator gets the satellite/cable TV package so that he can stream movies and TV shows directly to his television. He then goes berserk with joy.
That commercial got me thinking about contests or challenges to established planning. Most clients want to avoid their heirs fighting over the estate or having to defend the estate from an unintended heir. It can be a financial and emotional drain on the beneficiaries of the estate. Estate Planners try to do their best to ensure that the formalities are followed when estate planning documents are signed and that the person executing the documents has capacity and understands the effect of the documents.
I recently read an interesting article on this topic. (A Will and a Way, WALL STREET JOURNAL, by Anne Tergesen) The article points out that Nevada (among a handful of other states) now allows for pre-mortem probate. What this means is that a person can present his or her planning documents to the court and require a contesting beneficiary to present his challenges to the court before the Testator (person who signed the Will or Trust) passes away. The advantage is that the best witness for the court is still alive to defend his or her actions. The disadvantage is that the client must disclose his or her documents with the court and make the contents known to the beneficiaries. The result is that if the person later changes his or her Will or Trust, then the process must occur again. It’s an interesting idea and I don’t know if our firm has handled a case like this in our local probate court. But as a planner, it’s important for me to know that this is available.
The article points out some other tools that estate planners may use to prevent a challenge to a Will or trust after the client passes away:
1. Use a video message from the Testator to explain provisions of the Will. This may soften the blow to beneficiaries, but might also backfire if the Testator says something inconsistent with the Will.
2. Include a no-contest clause. We do this at our firm, and they are fun to talk about and point out to the client, but are not always enforceable and would not be enforceable if there was a genuine concern that the Testator had capacity or was subject to undue influence.
3. Provide a gift of cash or other property to a person that is suspected to challenge the Will. (I’ve never heard of this one and it made me chuckle). If the person accepts a gift from the Testator at that time, it will be difficult for the person to claim that the Testator was incapacitated at the time of the gift.
Other standby techniques not discussed in the Wall Street Journal article include:
1. Making a specific bequest to a potential challenger which then gives the no-contest provision some effect (they stand to lose something if they challenge and lose).
2. Contract around the challenge: use a family settlement agreement (signed by all family members including potential challengers).
3. Leave the person the satellite/cable TV package so that they can stream hundreds of movies and TV shows directly to their TV. (Probably won’t work).
An often asked question regarding the administration of Trust or Estate after a death occurs is:
1. What happens if the beneficiary predeceased the decedent?
In this age of longevity, it is not uncommon for a beneficiary named under the terms of a Trust or a Last Will and Testament to predecease the inpidual creating the Trust (the “Trustor”) or the inpidual creating the Last Will and Testament (the “Testator”). When this occurs, what happens to the bequest? For example, a Trustor provides that a specific bequest of $50,000.00 be given to her son, Joseph. However, Joseph predeceases the Trustor. When the Trustor dies, what happens to the bequest? Does it lapse and become null and void? Or is it still legal effective? The answer is it depends on the terms of the Trust or Will and the facts of the situation. Nevada has an anti-lapse statute which provides that a bequest is saved and does not lapse if the predeceased named beneficiary is a child or other relation of the Trustor-Testator and the beneficiary left lineal descendants who survived the Trustor-Testator, unless the Trust or Will provides otherwise. NRS 133.200 provides as follows:
“When any estate is devised to any child or other relation of the testator, and the devisee dies before the testator, leaving lineal descendants, those descendants, in the absence of a provision in the will to the contrary, take the estate so given by the will in the same manner as the devisee would have done if the devisee had survived the testator.”
In our example above, the predeceased beneficiary, Joseph is a child of the Trustor-Testator. If Joseph left lineal descendants (child, grandchild, et cetera) and the Trust or Will does not provide otherwise, the $50,000.00 bequest will not lapse but will pass to Joseph’s lineal descendants. This may or may not be what the Trustor desires. When one creates a Trust or Will, one should always discuss and consider the possibility of a beneficiary predeceasing. If one does not want the bequest to pass to Joseph’s lineal descendants, the Trust or Will should specifically state that in the event Joseph predeceases, the bequest shall lapse or shall pass to some other beneficiary.
At the Jeffrey Burr law office, we have many years of experience in assisting clients in their estate plans through the drafting and execution of their Trusts/Wills. As part of this service, we go to great lengths to determine exactly what the client desires, including the client’s wishes in the event a named beneficiary predeceases the client.
During the two years before expiration of the “Bush Tax Cuts” (which, from enactment, were set to end on December 31, 2010) tax attorneys expected something to come out of Washington which would provide clarity going into 2010, the year in which the estate tax was fully phased out, and for 2011, the year in which the estate tax was set to come roaring back with the full 55% top rate and an estate tax exemption reduced to $1 million, from the $3.5 million exemption available to estates of decedents dying in 2009.
By the end of 2010, most estate planning professionals guessed that a deal was not going to happen and that the 55% rate and $1 million exemption would come back in 2011, but like the U. S. Cavalry in a John Wayne movie coming to the aid of the settlers, Congress acted just in time, December 17, 2010, to increase the estate exemption to a full $5 million per person with a top estate tax rate of “just” 35%. This law is set to expire on December 31, 2012, and if not extended, will put us back to the 55% rate and $1 million exemption, so we could go through this exercise again in less than two years. The fact that we could end up with a reduced exemption in 2013 has prompted some advisors to suggest caution about using the $5 million exemption for gifts and general planning considerations.
The writer of this blog has been involved with the estate tax for 35 years now and during that time, despite all the rhetoric and hand-wringing, the estate tax exemption has never been reduced, other than through the 2011 repeal of the repeal of the estate tax. Before November 1981’s Economic Recovery Tax Act (“ERTA,” we affectionately called it; funny how those acronyms usually work out) the maximum exemption was only $60,000 as I recall, and with ERTA, it immediately jumped to $200,000 and then grew each year to be $600,000 per person. Then in the late 90’s the exemption was increased from $600,000 to $675,000 and then to a full $1 million at the turn of the millennium. (I have been waiting for the right time to use that phrase, “Turn of the millennium.”) Then with the Bush Tax Cuts, the exemption grew steadily from $1 million, to $1.5 million, to $2 million and finally to $3.5 million in 2009, which brought us to full repeal for those heirs lucky enough to inherit from decedents dying in 2010. So ignoring the repeal year of 2010, the exemption amount has now grown from $3.5 million to $5 million per person. What’s more, “portability” now exists between spouses, meaning that a surviving spouse basically “inherits” the right to use the unused exemption of their last deceased spouse.
With a history of 35 years and no reduction in the estate tax exemption over that time, what are the chances Congress will cut back the existing exemption from $5 million to something less? This blogger sees that as doubtful. Some might argue that Congress will try to raise revenue on the backs of the “rich” and will reduce the $5 million exemption. While this is possible, such a move would be more cosmetic than anything else because, even when the rates were higher and the exemptions lower, the estate tax has normally provided only about 2% of federal revenues. Therefore, barring a demagogic move at raising the estate tax, it is likely the exemption will remain at $5 million, at least. It is, therefore, this blogger’s opinion that clients should make their plans based upon the expectation that the $5 million exemption is here to stay.
The following snippet was taken from Bill Bischoff's article as published in the Wall Street Journal's Market Watch web page on February 16, 2011.
"16 States and DC Have Estate Taxes
"The sixteen states and the District of Columbia, which impose their own estate taxes (as opposed to inheritance taxes, which I will explain later) base their taxes on the entire value of an estate in excess of the applicable exemption.
"The exemptions vary from a low of $338,333 to a high of $5 million. Specifically:
* Three states have exemptions of less than $1 million (Ohio at $338,333; New Jersey at $675,000; and Rhode Island at $850,000).
* Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and Oregon), and so does D.C.
* Three states have $2 million exemptions (Illinois, Vermont, and Washington).
* Two states have $3.5 million exemptions (Connecticut and Delaware).
* Two states have $5 million exemptions (Hawaii and North Carolina).
"The lowest tax rates are 7% (Ohio) and 12% (Connecticut). The highest is 19% (Washington). The other 13 states and D.C. all charge 16%.
"6 States Have Inheritance Taxes
"The inheritance tax exemptions are zero or negligible--except in Tennessee which has a $1 million exemption.
"The tax rates are 9.5% in Tennessee, 15% in Iowa and Pennsylvania, 16% in Kentucky, 18% in Nebraska, and 20% in Indiana.
"Worst Case: 2 States Have Both
"Maryland and New Jersey raise confiscation to a higher level by charging both an estate tax and an inheritance tax. In Maryland, the inheritance tax exemption is a whopping $150 and the tax rate is 10% (in addition to the 16% estate tax rate). In New Jersey, the inheritance tax exemption is zero and the tax rate is 16% (in addition to the 16% estate tax rate).
"The Other 28 States Have No Estate or Inheritance Taxes
"The 28 states NOT listed above[, including Nevada,] have no estate or inheritance taxes. They are better places to die."
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