Volume 11 Issue 1-- January/February 1999
This is the last in a series of newsletters outlining practical approaches to
answering your clients estate-planning questions, even if estate planning is
not your forte. Incidentally, the prior two newsletters on estate planning (and
other issues) are on our Web site at www.tax-business.com.
Would you buy a car without a motor? Of course not. You may be surprised that some of your clients may have Revocable Living Trusts, RLTs (see the November/December 1998 issue of Tax & Business Insights for a description), that are without assets and could be dubbed essentially motorless. Heres why.
Lets say you have as clients a couple in their 70's with a large farm and
some securities, all jointly held. An RLT is prepared for each of them, but the
farm and securities are not retitled to reflect the RLTs as owners. Often, the
Husband dies first and, then, the Wife becomes the sole owner of everything.
When she dies five years later, without, of course, funding her RLT, all of the
marital assets go through probate and may, eventually, go into the Wifes
Obviously, the Husband and Wife had some dispositive wishes and planning objectives in mind when they had the two RLTs prepared, probably the desire to avoid probate and to use properly both spouses lifetime exemptions. Both of these objectives would likely have been defeated in the above-mentioned situation.
Remember, the estate and gift tax lifetime exemption will gradually become $1,000,000 by the year 2007. The proper use of the exemption by two spouses can protect $2,000,000 of assets from this tax. In addition, annual lifetime gifts of $10,000 to each recipient ($20,000 if a married couple is making the gifts) are excluded from the lifetime exemption calculation and can, if properly used, further, and substantially, reduce the estate tax over a series of years.
Is it unusual to discover unfunded RLTs? No. It is, in fact, rather common.
Why? Many Grantors (creators of RLTs) dont appreciate the need to fund RLTs and
some estate planners dont push hard enough for RLT funding. There are also many
other reasons, too numerous to mention in this newsletter.
A humourous observation among lawyers is that you can tell a new attorney from an experienced attorney by their respective approaches to reading court decisions. An inexperienced attorney will usually read from the beginning. A seasoned attorney will generally read the conclusion first to determine if he or she won the case.
There is a parallel when reading RLTs. Many RLTs have schedules attached which list the assets that have been transferred (titled) in the name of the Trust. Rather than attempt to read an entire RLT, you may instead make your first effort checking for schedules attached to the RLT.
Why check for funding? Unfunded RLTs are "motorless" in the sense that there is nothing under the hood until the Grantor(s) dies. Then, if there is a provision in the Will of the decedent that directs funding of the RLT after death, assets will be transferred to the Trust. Will provisions of this type are said to cause probate assets to pour-over to a RLT, hence, the name Pour-Over Wills.
Even if you do not have the ability fully to second guess those crafty estate-planning attorneys, you can determine if your clients have funded their RLTs. However, dont assume that assets have not been transferred to an RLT just because there is no list of RLT assets attached. While RLT asset lists are helpful, keep in mind that with land, bank accounts, securities, etc., the concept we called passing by operation of law (discussed in the September-October issue) is controlling. For example, a new deed is needed to transfer land, most often from some form of joint tenancy, to the RLT as owner. Sound complicated? It isnt, really. Such deeds can, or should be, routine for firms doing estate planning.
Want to see sample wording for instruments of transfer, like deeds,
securities, bank accounts, etc.? Click here for a one-page
sample of suggested wording for conveying assets to RLTs, as well as a sample
RLT and Pour-Over Will. If further help is needed, call us about this or related
estate planning issues.
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
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