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Trusts and Estates
University of Iowa School of Law
Hines, N. William

Introduction to Estate Planning
Sunday, January 11, 2009
9:44 PM
 
Power to Transmit Property at Death
o                        General Principles
·                               There has been a huge shift, going so far as to call the power to will or inherit property a constitutional right (Hodel)
§                                     States’ have broad authority to regulate this right – but they cannot abrogate the right
§                                     Constitutional protections arguably apply only to the decedent’s power to dispose of his property at death, not necessarily to a particular heir’s or beneficiary’s right to receive property from a decedent.
·                               Surviving spouses are now entitled to 100% of the estate; very typical arrangement
o                        Policy behind Passing Wealth at Death
·                               Reasons in Support
§                                     Provides an incentive to make wealth during life
§                                     Least objectionable arrangement for dealing with property at death
§                                     Desire to provide for family at death; expression of love
§                                     Savings are vital to the economy’s capital/investment base
§                                     Forces younger people to take care of old people and provides money for that care
·                                           Avoids the necessity of the government providing/reciprocal benefit
·                               Reasons against Passing Wealth
§                                     Dynasty/aristocracy problems where great fortunes remain in the same hands
§                                     Contributes to the wealth gap
§                                     Fundamentally unfair and furthers the benefits of the rich
o                        Different Proposals for Inheritance/Distribution of Estates
·                               Ascher Proposal
§                                     Advocates viewing inheritance as something to be affirmatively tolerated, not something that should always be protected
§                                     Essentially limits inheritance by healthy, adult children
§                                     Still allows a universal exemption of a still sizable sum
·                               Kristol Proposal
§                                     We should discourage the inheritance of large fortunes
§                                     Individuals would still want to make money to be rich during life
§                                     Wealthy men would have to distribute their wealth during their lifetime, making them popular and would encourage gifts/philanthropy
§                                     Inheritance corrupts young people anyway
§                                     Remember, this does not go to the state
o                        Family Wealth Transmission
·                               Many argue that most of what you pass on is cultural inheritance
·                               Education, money spent on children, make them in your own image, etc.
·                               Investment in skills is the real inheritance and main wealth transfer
·                               Human capital (education) is worth more than any property
·                               People live so long now that their middle-aged children do not depend on parental wealth transfer at death
o                        Hodel v. Irving(3)
·                               P was a member of an Indian Tribe and challenged a Federal statute. Originally, there was a statute divided the communal reservations of the Indian tribes into individual allotments for Indians. 
§                                     Statute provided disastrous because the lands were conveyed away or too small to be useful
§                                     Thus, Congress ended the further allotment of the sale of these lands
§                                     And passed Indian Land Consolidation Act, which forbid lands to pass by intestacy to further combat the fragmenting of the estates among multiple heirs
·                               P challenged § 207 because estates lost interests that went to the tribes when they normally would have went to plaintiffs
§                                     Thus, P claims this is an unconstitutional taking
§                                     D responds by saying that heirs can still use it during their lives, and convey it inter vivos
§                                     D also states that the value of such property is de minimis
·                               Court holds that this was an unconstitutional taking because the government is redistributing property from citizens back to the tribe
§                                     Individual who owned that right had a basic common law right to dispose of that property at death
§                                     Complete abolition of either descent or devise is an unconstitutional taking
§                                     Deals with Federal law rather than state law (changed common law expectations)
 
2.                 Taxation of Wealth Transfers
o                        Estate Taxes v. Inheritance Taxes
·                               Federal Government imposes estate tax and many state impose inheritance taxes
·                               An estate tax is levied upon the estate; on the total amount transferred
§                                     Easier to administer
·                               An inheritance tax is a tax imposed upon each beneficiary for the privilege of receiving the property
§                                     Benefits: can lower the amount of tax if decedent had lots of kids and it will be split up
o                        Unified Federal Estate and Gift Taxes
·                               Tax Reform Act of 1976
§                                     Unified gift and estate taxes for decedents or donors after 1976
·                                           Eliminated the gift tax loophole that was lower than the estate tax
§                                     Gift tax is cumulative, and each gift makes the taxpayer step up to a higher bracket
·                                           Thus, when you die, you might find yourself in a higher bracket than just your estate would make it seem
§                                     Bracket is determined by adding taxable estate plus any taxable gifts made
§                                     Charitable deductions are still unlimited
§                                     Marital deduction became unlimited (allowed transfer without taxation)
§                                     However, life insurance that does not belong to decedent is not counted in the estate
·                                           So make sure the beneficiary is not the estate but owned by your wife
§                                     Generation Skipping Loophole
·                                           Put everything in a trust to avoid the principle ever being paid out until generations later
·                                           Generation Skipping Tax of 1987: put taxes on this sort of thing to close the loophole
·                                                 Automatically taxed at the maximum rate
·                                                 Trust is taxed as if each person who is beneficiary owned it
·                               Transfer Exemptions
§                                     $3,500,000 is exempted from transfer taxation
§                                     Given in the form of a tax credit
§                                     The Code first imposes a tentative tax on all taxable assets and then provides the tax credit
·                               Gifts v. Inheritance
§                                     Gifts make more sense because they are taxed at what the person receives as a gift, not what is being given
§                                     So if you want to give A $1,000,000, at a tax rate of 50%, you would only have to give $1,500,000
§                                     If you were getting it through the estate, the tax would take 50% of whatever the tax base is (tax-inclusive)
·                                           It would take $2,000,000 to give $1,000,000
·                               Income Tax Ramifications
§                                     If you give a gift of property while you are alive, the value that the property is valued at is what you paid for it, regardless of its present worth
·                                           e.g.- real property bought a long time ago that is now worth substantially more
§                                     If you wait until you die and it passes in the estate, the property is valued at its present value
·                                           Can make this very expensive to inherit
o                        Holtz’s Estate v. Commissioner(853)
·                               Settlor set up a trust. The trust instrument provided that the trustee should distribute the net income and principal.
§                                     For lifetime of the settlor, the income should be paid to him
§                                     Upon death of the settlor, his wife should have the income paid to her
§                                     The then remaining principal was payable to the estate of the settlor
·                               Issue is whether
o                        Federal Gift Tax
·                               $12000 gift per year exemption
§                                     If you are married, this means that you can give $24,000
§                                     Must give a present interest to qualify for this exemption
·                                           Unless you are giving it to a minor who can’t possess it until later
·                                           Like putting gift into a college fund
o                        Federal Estate Tax
·                               Gross Estate
§                                     § 2033: Property owned at death
§                                     § 2035: Transfers of life insurance policies and certain other interests within 3 years of death
§                                     § 2036: transfers with a retained life estate or with retained controls
·                                           Like O——-A, with O retaining life estate
§                                     § 2037: transfers taking effect at death (reversionary interests)
·                                           Like O———A, with O reversionary interest
·                                           If that interest is in excess of 5%, it will be taxed in the grantor’s estate
§                                     § 2038:
§                                     § 2044: QTIP, certain property for which a martial deduction was previously allowed
 
3.                 Other Issues with Inheritance
o                        Problem of the Dead Hand
·                               Public Policy
§                                   

or can designate admin
§                                     Normally, admin must give bond
§                                     However, the will can waive this requirement
·                               Terminology
§                                     A dying testate D devises real property
§                                     A dying testate D bequeaths personal property
§                                     Intestate is descent for real property; distribution for personal property
o                        Summary of Probate Procedure
·                               Opening Probate
§                                     Performs 3 functions
·                                           Provides evidence of transfer of title to new owners by a probated will or intestacy
·                                           Protects creditors by requiring payment of debts
·                                           Distributes D’s property to those intended after creditors are paid
§                                     Primary (Domiciliary) Jurisdiction
·                                           Jurisdiction where D was domiciled at time of death
·                                           Where the will should first be probated
§                                     Ancillary Jurisdiction
·                                           Jurisdiction where real property is located if different than primary
·                                           Must have its own administrator normally
§                                     Informal vs. Formal Probate
·                                           Informal Probate: without giving notice to anyone, the PR petitions for appointment
·                                                 The petition contains all relevant info on people and assets involved
·                                                 PR has the duty of mailing notice to anyone involved after being appointed
·                                           Formal Probate: judicial determination after notice to interested parties
§                                     Statute of Limitations
·                                           If no proceeding is initiated, either formal or informal, after 3 years after the death, then the presumption of intestacy is conclusive
§                                     Time for Contest
·                                           The time to contest the probate of a will is dependent on the jurisdiction
·                                           Once the SOL passes, the court cannot revoke probate
§                                     Barring Creditors of D
·                                           Every state requires creditors to file claims in a timely fashion
·                                           If they do not, claims are barred (nonclaim statutes)
·                                           Remember, DP requires that known or reasonably ascertainable creditors receive actual notice, rather than constructive notice
·                               Supervising the Representative’s Actions
§                                     In many states, actions of the PR are supervised by the court
§                                     Court must approve of every one of their tasks
§                                     UPC authorizes unsupervised administration as well as supervised
·                                           If no interested party demands supervision, then there is independent administration
·                                           The PR then does not have to go back into court and has broad powers
§                                     Estate may be closed by PR filing a sworn statement that he has published notice to creditors, administered the estate, paid all claims, and sent a statement and accounting to all known distributees
·                               Closing the Estate
§                                     PR must complete duties as promptly as possible
§                                     Judicial approval is required to relieve PR from liability unless SOL tolls on actions against the PR
·                               Avoiding Probate
§                                     Small estate administration: Iowa, $100,000 limit
§                                     Personal Property
§                                     Cars: (Supp. 22): just have to give an affidavit relating to the disposition of the automobile
§                                     Savings Accounts