According to the most recent estimates from the U. S Census Bureau, Nevada ranked fifteenth (15th) in state population growth. Many residents of Nevada are transplants, having lived and worked in other states before relocating to Nevada. Most states are “separate property states”; however, Nevada is a “community property state”, one of only nine (9) such states. Generally speaking, in a community property state such as Nevada, each spouse owns an undivided one-half interest in all property acquired during the course of a marriage regardless of how the property is titled. (Exceptions to this rule are property acquired during marriage by gift or inheritance and an award of personal injury damages, which are the separate property of the recipient only.) Contrast community property law with separate property state law under which ownership is determined by how the asset is titled. For example, assume two hundred (200) shares of Apple stock are purchased during the course of a marriage and are titled in the individual name of the husband. In a separate property state, ownership of all of the stock is vested in the husband, while in a community property state such as Nevada the husband has a one-half ownership interest in the stock and the wife has a one-half ownership interest in the stock.
However, what happens if property is acquired during the course of a marriage while the couple are residents of a separate property state, they then move to a community property state such as Nevada, and are residents of Nevada when the first spouse dies? This is a very common occurrence in Nevada. At the time of death of the first spouse, is the property the separate property of the spouse in which the property is titled per separate property state law or is the property owned one-half by each spouse per community property law? In Nevada, ownership of an asset acquired during the course of a marriage is determined under the laws of the state in which the couple was domiciled when the asset was acquired, and the ownership is not altered if the couple moves to another state. Accordingly, since the asset was acquired when the couple were residents of a separate property state, the asset is the separate property of the spouse in which the property is titled per separate property state law.
Understanding community property law, separate property law, and how and when they are applied is essential in the proper determination of what assets the deceased spouse owned for death tax, allocation of assets and administration purposes.
An estate-tax planning technique often contained in many Trust agreements for married individuals is to require the establishment of two or more sub-trusts when the first spouse dies, in particular the establishment of an Exemption Sub-Trust. If the Trust agreement is properly drawn and the Exemption Sub-Trust correctly administered during the life of the surviving spouse, at the time of the death of the surviving spouse all of the assets of the Exemption Sub-Trust pass to the beneficiaries federal estate-tax free. This is true even though all of the income (and principal if need be pursuant to an ascertainable standard such as for health, education, maintenance and support) from the Exemption Sub-Trust is used for the benefit of the surviving spouse during his or her lifetime. The equivalent exemption amount for federal estate tax purposes for deaths occurring in 2012 is $5,120,000.00 and the tax rate is 35%, but as of January 1, 2013 the equivalent exemption for federal estate tax purposes for deaths occurring in 2013 and thereafter is reduced to $1,000,000.00 and the tax rate is increased to 55%. Accordingly, this estate-tax planning technique is of great importance.
When the first spouse dies, the Successor Trustees must determine what Trust assets should be used to fund the Exemption Sub-Trust. This is a very important determination in light of the fact that the Exemption Sub-Trust assets remaining at the time of the death of surviving spouse will not be subject to federal estate tax regardless of value. In other words, the Exemption Sub-Trust assets could be worth $20,000,000.00 at the time of the death of the surviving spouse and the equivalent exemption under law could be only $1,000,000.00, but nevertheless the assets of the Exemption Sub-Trust will not be subject to potential federal estate tax. Therefore, assets with high appreciation potential (i.e. Apple stock, real estate on the Las Vegas Strip, et cetera) generally speaking should be used to fund the Exemption Sub-Trust. But as is always the case, there is an exception to every rule. The exception is where the beneficiaries of the Exemption Sub-Trust and the beneficiaries of any other sub-trust are not one and the same individuals. In most situations, the beneficiaries will be the same. However, where the beneficiaries will not be the same, the Trustee has to consider this when funding the sub-trusts in that the Trustee has a fiduciary duty to treat all of the beneficiaries fairly and impartially in carrying out the terms of the Trust agreement. A corporate or individual Trustee could subject themselves to claims by non-beneficiaries of the Exemption Sub-Trust if in fact all of the assets with high appreciation potential are used to fund the Exemption Sub-Trust.
At the Jeffrey Burr law office, we have many years of experience assisting and advising corporate and individual Successor Trustees in the administration of a Trust after the death of a Trustor, including the funding of Exemption and other sub-trusts.
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.
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.
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.
Unfortunately in this time of economic turmoil, the assets of a Trust or an Estate, such as real estate, deeds of trust, stocks and bonds, can significantly decrease in value from the time the Trust was established or the Last Will and Testament was executed and the date of death. Accordingly, an all too often problem in this day and age facing the Successor Trustee or the Personal Representative is which creditors of the Decedent to pay? In the event the Trust or Estate ultimately does not have sufficient assets to pay all of the creditors, a Successor Trustee or a Personal Representative could be held personally liable for failing to pay a creditor and/or improperly paying a creditor.
Under Nevada law, the debts and charges of a Trust or Estate are ranked in order of priority for payment. For example, the highest priority for payment is the trust or estate administrative expenses, followed next by funeral expenses, then followed by last illness expenses and so on. One must be careful to strictly follow this statutory order of priority if there is a chance there will not be sufficient funds to pay all creditors. If a Successor Trustee or a Personal Representative pays a lower priority creditor and then does not have enough funds to pay a higher priority creditor, the Successor Trustee or a Personal Representative will have to personally pay the higher priority creditor and then attempt to seek reimbursement from the lower priority creditor who was paid.
A related problem is what to do if, after proper payment of some creditors, there are not enough funds left to pay all of the members of the next priority class. An example of this would be to pay all administrative expenses and funeral expenses in full, but then not have enough funds to pay all of the expenses related to the decedent’s last illness. In this situation, the last-illness creditors should be paid on a pro-rata basis.
At the Jeffrey Burr law office, our attorneys have many years of experience guiding Trustees and Personal Representatives in properly carrying out their administrative duties, such as dealing with creditor claims and the proper payment of such claims.
Most people in this day and age establish a revocable trust during their lifetime that becomes irrevocable upon their death. When the Trustor dies, beneficiaries of the Trust, of course, want to receive their share of the Trust as soon as possible after the death occurs. However, the Trustee obviously does not want to distribute the assets of the Trust to the beneficiaries per the terms of the Trust agreement only to then face subsequent litigation contesting the validity of the Trust agreement. What, if anything, can a Trustee do if the Trustee anticipates that someone may contest the validity of the trust?
Nevada law, namely NRS 164.044, furnishes one solution. Under this Nevada statute, the Trustee may provide written notice to any beneficiary of the Trust, to any heir of the Trustor, or to any other interested person within 90 days after the Trust becomes irrevocable (the date of death of the Trustor). The recipient of the notice must bring an action to contest the validity of the Trust within 120 days of the notice being served upon him or her. If the recipient fails to bring an action within such 120 day period, they are barred from doing so later on. Accordingly, once the 120 day period passes without the commencement of litigation, the Trustee can feel relatively safe in making the Trust distributions and not facing subsequent litigation.
A Trustee should also always require a beneficiary to sign a written Receipt and Release in which the beneficiary acknowledges receipt of all property that he, she or it is entitled to under the Trust and the beneficiary releases the Trustee from any and all liability as Trustee. This signed Receipt and Release should be obtained prior to, or contemporaneous with, the Trust distribution to the beneficiary. A Trustee does not want to make a Trust distribution to a beneficiary only to have the beneficiary use the distribution to hire an attorney and initiate litigation against the Trustee and the Trust.
At Jeffrey Burr, our attorneys have many years of experience assisting Trustees in the administration of a Trust after the death of a Trustor and protecting them from the potential pitfalls in serving as a Trustee.
Attorney John Mugan
When someone is the beneficiary of a Trust or Estate, one of the first questions the Trustee of the Trust or the Personal Representative of the Estate is asked is “When will I receive my money?” Human nature being what it is, most people want their share of the Trust or Estate “yesterday” or as soon as possible. Oftentimes the beneficiary making the inquiry is related to the Trustee or Personal Representative, and this places the Trustee or Personal Representative in a difficult position. What factors should the Trustee or Personal Representative consider before making any distributions?
A major factor to consider is possible creditor claims. A Trustee or Personal Representative does not want to distribute the Trust or Estate monies to third party beneficiaries only to discover later that the decedent or the Trust is legally indebted to a creditor. In such a situation, the creditor oftentimes will pursue the Trustee or Personal Representative for the amount of claim, and the Trustee or Personal Representative is left trying to seek reimbursement from the beneficiaries. Unfortunately, once the monies are distributed, the monies are usually “gone” from a practical point of view and it is very difficult to recover the reimbursement from the beneficiaries. The law recognizes this quandary, and furnishes the solution for the Trustee or Personal Representative by way of a notice to creditors and a limited time period for filing claims procedure. For example, under Nevada law a Trustee or Personal Representative can publish a Notice To Creditors once each week for three (3) consecutive weeks and mail a Notice to known or readily ascertainable creditors. Notice must also be given to the Department of Health and Human Services if the decedent received public assistance during his or her lifetime. A creditor having a claim due or to become due then has ninety (90) days from the first publication date and ninety (90) days from the mailing date as to those creditors to whom notice must be mailed in which to file a written claim (some creditors have the later of ninety (90) days from the first publication date and thirty (30) days from the mailing date). If the creditor fails to file a written claim within the applicable time period, generally speaking the creditor is forever barred from enforcing the claim even though it was a legally owed debt on the date of the death of the decedent. Accordingly, once notice is given and the applicable time period for filing claims has passed, the Trustee or Personal Representative can be reasonably assured that there are no unknown claims lurking.
Two exceptions to the rule are mortgages-deeds of trust and income taxes. Mortgages-deeds of trust are recorded with the County Recorder and a matter of public record, so the holder of the mortgage-deed of trust need not file a written claim in order to perfect its lien against the real estate. Normally the Trustee or Personal Representative is aware of the mortgage-deed of trust as a result of a review of the financial affairs of the decedent which discloses monthly payments to the holder of the mortgage-deed of trust. Also a search by a title company of the public records regarding any real estate owned by the decedent will disclose any mortgages-deeds of trusts of record.
Income tax reports of the decedent or the trust or the estate can be audited by the IRS (or by a state if state income tax involved), possibly resulting in additional tax, penalties and interest owed. This potential problem is solved by holding back a sufficient amount of money from the distributions to pay any such additional tax, penalties and interest.
There are a number of other significant factors to be considered before making beneficiary distributions such as potential legal challenges to the validity of the Will or Trust of the decedent, priority of payments, terms of the Trust or Will, et cetera. Accordingly, a Trustee and Personal Representative should always consult a knowledgeable estate and trust attorney before making distributions. At Jeffrey Burr Law Office, our trust administration and probate attorneys have assisted numerous inpidual and corporate Trustees and Personal Representatives in performing their duties, including being the bearer of bad news to the beneficiaries as to why a distribution cannot be made immediately.
Many people who establish Trusts prefer to nominate an individual, often a child or other family member, as a Successor Trustee of their Trust in the event of their death. The law imposes a number of duties and responsibilities on the Successor Trustee which if violated, even unknowingly and with the best intentions, will cause the Successor Trustee to be personally liable for any damages suffered by the Trust or its beneficiaries. For example, an individual Successor Trustee is often also a beneficiary of the Trust. A conflict of interest arises in that the individual on one hand is a Trustee with a number of duties and responsibilities to the Trust and its beneficiaries, and on the other hand is a beneficiary of the Trust with his or her own self-interests. The law allows this conflict of interest, but imposes on the Successor Trustee a duty of undivided loyalty to the Trust and its beneficiaries. In other words, the Successor Trustee must always put the interests of the Trust and it beneficiaries ahead of his or her own self-interests. The fact that a Successor Trustee is an individual and not aware of the duty of loyalty is no defense to an action for damages by one or more of the Trust beneficiaries.
At the law firm of Jeffrey Burr, we have many years of experience assisting and protecting individual Successor Trustees in the administration of a Trust after the death of a Trustor. One of our main objectives in doing so is to educate the Successor Trustee as to his or her many duties and responsibilities, such as the duty of loyalty, the duty to keep the Trust property separate (no commingling), the duty to preserve Trust property, the duty to keep Trust property productive, et cetera. Remember if you are an individual Successor Trustee, do not unwittingly put yourself in a position of possible personal liability, as lack of knowledge of your legal duties is no defense. In the case of a Successor Trustee, ignorance is not bliss.
Most of our clients understand the benefits of the living, revocable trust. One obvious benefit is that at the trust creator’s death, the named successor trustee can step in very easily and administer the estate generally without the involvement of the court system. When the trust creator dies, a death certificate is provided and our office prepares a document called the “Affidavit of Successor Trustee” which gets filed in the counties where real property is located; this document is also provided to banks, investment companies, etc. and allows the successor trustee to gain control of these accounts for ultimate distribution.
We advise our clients with trusts to be aware that they don’t have to wait until death to bring in the successor trustee. If the trust creator is getting to the point where they want to slow down and let their successor trustee assist in taking care of the trust assets, paying bills, collecting rents, etc., then the trust creator can execute a document naming the successor trustee as a current trustee. That successor trustee can take the document to the bank and thereby have power to write checks to pay bills, handle investments and so forth. Then at the trust creator’s death, the successor trustee is already on the accounts and so can begin immediately to carry out the trust creator’s wishes. If you feel like you could use the help of your named successor trustee, you might want to consider naming them as a current trustee with you. Just be sure that the person you name is “trustworthy”.
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