Trusts and Estates

28 April

• So, back with that review problem 1:
  Items in the gross estate:
  • Car: $25K
  • House: $300K
  • Furnishing: $10K
  • Varoom: $375K
  • Life Insurance: $3,400

  ---

  • Total: $4,110K
  • Deductions: $115K
  • Taxable estate: $3,995K

  ---

  Now we're working on those gifts. First, we go through the gifts and see if theyre taxable.
  • $800/month * 12 months: $9,600. The taxable exemption was $10K back then. So this is a gift covered by the exemption.
  • $35K paid directly to the provider of educational services is also exempt.
  • $3K paid directly to Blue Cross for health insurance is als exempt.
  • $400 camera in the same year as the $800/month, but that only takes us up to a total of $10K, so it is still not taxable.
  • $14K gift of half a car (might want to value this a little differently, since you can't sell half a car. So $13K of that is exempt, and that means $1K is taxable.
  • $25K disclaimer (§ 2518). This is free of the gift tax (in fact, that's why peopl use disclaimers-- to avoid gift tax).
  • $5K trust; this is a gift of a future interest, so the $13K exclusion doesn't help.
  Now it's possible for something to be a taxable gift and also in the gross estate, and we want not to double-count things for taxing them. The 1/2 interest in the car is wiped out, because the car is in the gross estate. So we have adjusted taxable gifts of $5K. That makes the estate tax base $4M exactly.

  So we're going to assume that we valued all these assets as low as possible, since we knew from the getgo that the estate would be over $3.5M. And we're going to re-value everything at 6 months, in case we can get some benefits from alternate valuation.

  It is nearly always true that it's better to pay less estate tax: not only is income tax generally lower, but it's not paid until the future.

  Now some questions.

  • 1: No, if it's payable to the it's still in the gross estate. Same-same.

    If it's to United Cerebral Palsy of Dane County, we could probably take advantage of the charitable deduction. Note that both for the charitable deduction and the marital deduction, it's important to be paid directly (or else it's complicated). So we might want to check to make sure that it's going directly enough. But that shouldn't be a problem here. This would humongously reduce the taxable estate (tax base would be $600K). We'd still have to file a return (because the gross estate + the adjusted taxable gifts was high), but no tax would be due.

    Note also that the minute the estate tax base goes down so low, we want to start valuing our other assets (the house and the Varoom stock, e.g.) as highly as possible.

  • 2: This is a tricky one: there's a transfer to a charity with a contingency. So it's not outright to the charity (that makes it complex). If the child survives, though, there's no charitable transfer.
  • 3: So here, the charity is going to get something, but not outright. This requires expert tax counsel to figure out. It turns out tha this doesn't qualify, but had the document been modified (to be a "unitrust" with percentages of the assets allocated to the child), there could have been a deduction. But we would be expected to spot that.
  • 4: 50% of the life insurance would be owned by the spouse. There's no marital deduction for that-- it's just not in the gross estate. So we'd be under $3.5M, and we'd again be in the happy position of trying to value assets higher. Even if the spouse was the beneficiary, there would still be 50% of it in the gross estate. The naming of the beneficiary is binding only on the portion of the policy that the person owns, and the spouse has a remedy to get her half back. If she fails to do so, she has made a gift.

    But. ERISA: this was a policy through the decendant's employer. So it trumps state law having to do with employee benefits, but we haven't said for sure that this is a private employer, but the facts imply that it is. How ERISA will apply is a bit of a law-in-action question; we can't be 100% certain. But if it does, it could wipe out the whole marital property line of reasoning. If this were a retirement benefit question, and not a life insurance question, the spouse would have a share (if you're married for more than 1 year, ERISA gives a spouse a share of the retirement benefits-- but it doesn't do that for life insurance).

  OK, so a $4M estate tax base. We look at the chart, and we see that we're in the tippy-top bracket. So we've got the tax on the first $2M (780,800), and then we're going to have to pay 45% on the rest. So 45% of $2M (the remainder) is $900K. So the total is $1,680,800. A huge amount of money. But, there's a credit, which is the tax on $3.5M: $1,455,800. So after the credit, only $225,000 is due.

  Note that we didn't address state inheritance taxes. State death taxes can be important (about 18 states have them), and they can be very convoluted. So it's important to be aware that this can be an issue. KNOW THESE FOR THE EXAM:

  • $675K trigger: NJ, OH
  • $1M trigger: DC, MA, MN, NY
  • $2M trigger: IL
  There's not much we can do with this, but we need to know to look out for them.
• Good exam advice: don't look for shortcuts-- when confronted with options, show you've spotted them, but pick the ones that allow you to show what you know.
• Problem 2
  So the couple has put up different amounts of money into the house. But they each own 50% of the house. So 50% is in his gross estate, which is $60K. Will any tax be due? Well, we don't know the estate tax base, but regardless, it's a JTWROS: the ROS means it goes to the spouse, and there's the unlimited marital deduction. So no tax due because of the house.

  When he dies, his half gets new basis (§ 1014 -- ordinary rule). If it's community property, and the decedent's half gets new basis, the spouse also gets new basis. But this is not community property, so she keeps her old basis of $40K. Total basis is $100K.

• Problem 3
  So we know an estate tax return will be filed, but we don't know what (if any) tax will be due. But we think we're going to be paying taxes, so we WANT a low appraisal. So no, don't get another appraisal.

  But in the spouse situation, yes, we'd want a higher appraisal, because it's covered by the marital deduction, and the spouse would get the new basis.

• Problem 4
  Well, first off, we now know there are death taxes in MN, so we need to worry about that. Maybe we don't particularly want a higher appraisal-- we need to get some MN tax advice. Also, we only want a higher basis if we're planning to sell, but if so-- is that offset worth paying the higher MN tax?
• Appendix P for Thursday.
• 4 questions on part 1, 3 questions on part 2. They're graded separately. There can be some overlap in subject matter, of course, but the focus is different.
• Follow the directions about separating pages.
• Don't be shy about highlighting the statutes (see, esp., the § 705.10 handout)

30 April: Review Session

• The order in which you think about things is different from how they got covered in class. Always begin with ownership: who owns what? Then: is it probate or non-probate? Then you come back and ask what the tax consequences are-- generally this tracks property law (except non-spousal joint tenancy [2040a] and 2036: something given away, but continued to exercise control). And then: law in action. There's never a right answer with law-in-action, because it depends on how people interact, but you can maybe spot chances to influence.
• Our exam will have 7 problems (4 and 3). It's 3 hours long.
• Problem 1
  Note that bad practice is not necessarily malpractice.

  There's a lawyer-client relationship here.

  • Not everyone dies in the order they expect. It's important to plan for all possibilities.
  • A will is a bad place to make funeral arrangements: it won't get probated until way after you're dead. You can use the § 154 final disposition instructions. But still, the best thing is to talk to the family about it, rather than spring it on them at the end.
  • Marital property doesn't have survivorship by default.
  • And also, we don't know how much of their property is marital.
  • Should refer the client to a specialist: off-the-cuff advice like this is dangerous.
  • The form will might be dangerous, or at least shouldn't be given out to the client to fill in.
  • Need to find out more about the client's fear of assisted suicide: it generally doesn't happen against someone's wishes-- that's what suicide is.
  • A living will might not be flexible enough: it's just a directive about certain things (vegetative state, and being allowed to die, which is probably not what he wants). He might be better served by a power of attorney-- health care.
  • Might be interesting to know more about the previous marriage, and whether there are kids.
  • Oh, and non-probate property, as well... might make sense to find out of there's any of that.
  • Bottom line: you can't just be writing wills for people without finding out more.
• Be sure you stay with the central issues. You'll never get points off for saying something peripheral (unless it's wrong), but you want to use your time wisely. What is the question asking, and how important is what you've got to say to that?
• Problem 2

  	          [Carol]
  		  /  |  \
  		[C1][C2] C3
  		/ |  |
  	       G1 G2 G3
  	

  Note that a cousin is not necessarily descended from the same grandparents. There are remote cousins, or adopted ones, etc. But anyway, state your assumptions, if you're making any.
  • So the cousin is dead, and there's an anti-lapse issue. You have to be alive in order to take under a revocable transfer in WI, unless the document says different. § 854.06, and the 854.04. So G1 and G2 each get 1/6, G3 gets 1/3, and C3 gets 1/3.
  • If Carol is not the issue of the same grandparents, it's a failed transfer under § 854.07, and it would go back to the residue and most likely pass through intestacy. That would be style points, but it's not a central matter.
  • It's unlikely that these people will share a spittoon. Is it important to them? We know the legal result, but there's more to be said about the practical result.
• Can bring a calculator if you want. The numbers are supposed to be friendly. Bad math won't hurt us, though.
• Problem 3
  • As a general point, WI does not allow holographic wills (see requirements in § 853.03(2)).
  • But under § 853.05(1)(b)(2), it looks like it would be valid. WI is very liberal about other states' execution formalitites.
  • Law-in-action: we need a WI court to recognize that this is valid in UT. Even though the WI statutes say it's OK, it's still pretty foreign here. You don't want to trust overly in the conflicts-of-law statute. You've got legal authority on your side, but it might be an annoying point of contention. If H is not dead, we'd advise him to make a will valid in WI. Again, this is sort of style points: we're just asked about the validity of the will, not whether this is a good idea.
  • Since there are no witnesses, how would we know that it was done in UT? It's a reasonable inference, but that's something to think about.
• Questions are weighted somewhat relativistically: there's not necessarily a set ratio between them. An outstanding answer should be able to help you, not be capped by some limit.
• Problem 4
  • § 853.11(1m): revocation by physical act. There was no intent when the coffee was spilled, but there was intent when he threw it in the trash. However, did that obliterate it? Probably not. It'll depend a little on exactly what happened.
  • So the legal result is unclear. Law-in-action to the rescue: if the will is physically gone, intent is sort of irrelevant. In general, if a will is missing, you assume it's revoked unless there's some reason to think otherwise.
  • § 856.17: the missing wills statute. How we can prove the contents of it, if needed.

---

• Problem 5
  • + $1,000 fee
  • + $1,500 gift
  • - $1,000 gift
  • Total: $1,500
  • Most likely tracing rule is maximum marital benefit, so probably $1K is marital, $5K individual.
  • Of course, if it couldn't be traced, it would all be marital property (supermax rule), but here we have "excellent records."
• Problem 6
  • So we start with the Acme stock: proceeds from the sale of individual property remain individual property, as long as they can be traced.
  • Is this active or passive appreciation? There's substantial management effort. There's substantial appreciation. But did that work cause the appreciation? On the one hand, no: she's not trading. Plus, she's looking to the broker for advice. On the other hand, the act of deciding not to do something is itself an act, and might have quite a profound effect. But she sure didn't *cause* the stock to go up. And is it possible to spend 25 hours a week monitoring one stock? Well, she made her portfolio go up, and she's probably looking at alternative stocks the whole time.
  • The presumption here is that there isn't active appreciation, so if you're not sure, it's not.
  • So if there was active appreciation, there could be $10K individual, and $990K marital (of which W would own half). But the decisionmaker will have to determine what portion of that appreciation was actually resulted from W's efforts (maybe based on how much it appreciated relative to the general market).
• Problem 7
  • It's unclassified, because it was bought before the determination date. We treat this as individual during life, but it's deferred marital property (would have been marital, had the act applied, because the source of the funds can't be traced). If the downpayment was from funds that were individual, there might be two components. Remember:
    1. Did the marital property act apply? If not: unclassified.
    2. If unclassified, would it have been marital property, had the act applied?
  • It's not marital property, and her name's not on it, so there's no power conferred under § 766.51(1)(a), but see (8), which directs us to § 706.02(1)(f): joinder of the homestead-- can't be conveyed without her consent. Of course law-in-action: she may have a great deal of power, informally granted. :)
  • § 861.21: the buyout right. But this doesn't apply, because it's a specific transfer (2). You can talk about the deferred marital property issue, but that's not a homestead right. So there might be an election that would help her out, but we don't know for sure, because we don't know about the rest of the estate.
  • On the other hand, the Law School probably doesn't want the house itself-- they'd like to sell.
• Problem 8
  Not much to say here. The property is subject to division. § 767.61(2) & (3)
• Problem 9
  • 50% under § 2033. Maybe some discount for lack of control or marketability, if you want to argue that way. We might assume they're not going to pay tax (since almost nobody does), so we might not argue for a discount.
  • They started with a basis of $2.5K each, and it's in D's gross estate at $12.5K, sister's basis is still $2.5. Decedent's interest gets new basis, and it goes to the nieces and nephews. § 1014 - usual rule.
  • No. Basis has nothing to do with who you left it to in this context.
  • Note that the facts don't say who paid for it... but the basis answer is the same if it were a gift (basis goes with the gift). That would have gift tax implications but not basis implications.
• Problem 10
  She's made a $7K taxable gift. She needs to file a return and report it, and it will erode her ability to give gifts in the future.

  The couple could split the gift (§ 2513), but maybe H isn't agreeing to do this.

  Or if the gift got deposited into a joint account, she'd need the cooperation of the husband to give it, since it's more than $1K.

• Problem 11
  • Clearly it will effect the estate tax base, because that will drop to $0 after the the deduction.
  • Taxable estate is also $0, because of the deduction.
  • Gross estate might go up: we're tempted to value the land higher.