You are on page 1of 38

Wills, Trusts, and Estates

Week 3
Spring 2015

What property interest do I have?

I have use of the music rights to Party in the USA for
10 years
I am allowed to live here for the rest of my life
John and Mary own a house as Joint Tenants with right
of survivorship. However, John executes a will that left
his interest in the house to his son. Who gets what?

Community Property v.
Separate Property
2 systems that each provide mechanisms for recognizing
a spouses contribution to assets acquired by the other
spouse during marriage.
Community Property = each spouse owns undivided
interest in all community property (all property earned by
the couple during the marriage while domiciled in a
community property state EXCLUDING: property
acquired by gift or inheritance).
Separate Property/Common Law system of marital
property = each spouse owns all that he or she earns or
is titled in their individual name and has no ownership
interest in the other spouses earnings.
Divorce then equitable distribution of a couples marital assets
Common Law Protections for surviving spouses
Elective Share Statutes

Separate Property Example

Ownership is determined solely by title.
H and W live in a separate property state. H
works outside the home earning $100,000/year.
Using his earnings, H has purchased, in his
name, a house, a car, and investments worth
$80,000. H will be considered to be owner of all
of the property titled in his name, regardless of
his marital status at the time of the propertys

Community Property Example

Death of a spouse dissolves the community between a
couple, giving the surviving spouse outright ownership in
his or her half.
H and W live in a community property state. H works
outside the home earning $100,000/year. W is at home
raising the children. Using his earnings, H has purchased,
in his name, a house, a car, and investments worth
$80,000. Assuming that all of their property was acquired
with Hs earnings since the time of the marriage, W will be
considered the owner of half of the house, car, and

Community Property
9 1/2 states: Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, Wisconsin

Alaska = Community property is not community property unless

the couple agrees to such

Each spouse is free to transfer their interest in the

property at death
Property acquired in a community property state
maintains its community property character even if the
couple later lives in a separate property state.
Once property is classified as Community or Separate, it
retains its status regardless of changes in form UNLESS
there is Commingling or Transmutation.
H and W live in a community property jurisdiction. W
inherits $100,000 from her grandmother. W sold the
stock and purchased a cabin with the proceeds. The
cabin will be classified as separate property since the
stock used for its purchase was inherited.

Community Property and Estate

Decedents half of community property and his separate
property will be included in his Gross Estate.
H and W, a married couple live in a community property
jurisdiction. H has $150,000 of separate property and H
and W have $800,000 community property.
At Hs death, his gross estate will be $550,000 ($150,000
separate property plus of the $800,000 community

Community Property and

Income Tax
Double step-up basis rule
H and W, while living in a community property state,
purchased stock for $100,000 with community property
funds. At Hs death, the stock was worth $1million.
Under Hs will, he transferred his share in the stock to W.
Only $500,000 of the stock will be included in his Gross
Estate, BUT both H and Ws stock will be given a new
basis equal to the stocks FMV at the time of Hs death.
What capital gains tax will W incur if she sells the stock
for $1million?

Separate Property and Income

Basis issue of JT in a separate property state
H and W, while living in a separate property state,
purchased stock for $100,000 as joint tenancy with right
of survivorship. At Hs death, the stock was worth
Only $500,000 of the stock will be included in Hs gross
estate for federal estate tax purposes. Since only
$500,000 is included in Hs gross estate, Ws basis in
the stock is only $550,000 ($500,000 from her husbands
share and $50,000 from her half share). If W sells the
stock for $1 million, she will be subject to income tax on
$450,000 (difference $1 million and her basis of

Situs and Domicile

Situs is the place where property is located or kept
All transfers of real and tangible personal property are subject to
the states law and that states taxes where the property resides
Tangible personal property may also be taxed by the domiciliary
state even if its located elsewhere

Domicile is the place that individuals consider their

permanent residence.
Generally, where an estate is probated, distributed, and taxed
unless there is property in other states
Intangible personal property is generally taxed by the state of

Example of Domicile and Situs

Ted was domiciled in state X at the time of death
but owned real property in state Y. Teds will is
invalid under the laws of state X, but valid under
the laws of Y.
What will govern the transfer of Teds property?
The real property in Y passes under the
provisions of Teds will, but Teds other property
passes under the intestate succession laws of X.

Multiple Taxation
More than one state can tax the same
In re Dorrance Estate, the Court held that
it was legal for more than one state to
have an interest in the property of an
Meaning if domicile is lawfully found in 2
states, there is no constitutional barrier to
taxation by both states


Is an individual or institution charged with the duty to act exclusively

for the benefit of another party as to matters within the scope of the
relationship between them.
Duties exist until the trust terminates according to the trust
Duties exist until legal disability or minority of ward ends
Personal Representative of an estate (executor/administrator)
Duties exist until estate is settled and property is distributed

Duties of a Fiduciary
Duty of Loyalty
Usurping opportunities

Duty of Care
Act as a person of ordinary, care, and skill
would under similar circumstances
Includes investing and managing assets for
See also Uniform Prudent Investor Act (UPIA)

Breach of Fiduciary Duties

Can be civilly and criminally actionable.
Example: A trustee borrowed trust assets
for his personal use. He converted these
funds and never repaid the trust.

Transferring/Disposition of
Ones Property upon Death
Via Probate

Via Nonprobate by operation of law

Defining Probate
The judicial procedure by which a
testamentary document is established to be a
valid will;
Process of resolving all claims and distributing
the deceased persons estate
Property passing to beneficiaries by Will or by
the laws of Intestacy to heirs

Probate Property v. Nonprobate

Probate Property = is all property directly owned
for which there is no legally recognized death
beneficiary designation.
Nonprobate (also called Will Substitutes) =
describes the variety of property interests in
which the law recognizes death beneficiary
designations that bypass the probate process and
is distributed directly to the name beneficiary.

Probate Property that Pass

Through the Probate Process
Real estate owned in Fee or in TC
Bank accounts (not owned in JT or a POD
Tangible personal property
Interests in partnerships, corporations or

Nonprobate Property (Will

Substitutes) - Passes Outside of
the Probate Process
Tenancy by the Entirety and Joint Tenants with Right of
Retirement Accounts (IRAs, pension plans, mutual fund
arrangements under 403(b) and 401(k) plans, etc)
Life Insurance
Contracts with Payable-On-Death (POD) designations
(brokerage accounts, mutual funds, securities, etc)
Totten Trusts
Beneficial interests in trusts

Beneficial Interests in Trusts

Example 1
Passes outside of Probate where
beneficiaries interest terminates at death
Sarah established a revocable inter vivos trust
which provides that during life, Sarah is entitled
to all income from the trust and has the power
to invade the principle. The trust also provides
that upon Sarahs death the trust principal will
be distributed to Ben.
Upon Sarahs death the interest in the trust will
pass to Ben outside of probate.

Beneficial Interests in Trusts

Example 2
Passes via Probate where beneficiaries
interest does NOT terminate at death
Sarah established a trust for the benefit of Alan and
Ben. The terms of the trust provide that Alan is
entitled to the income from the trust for 10 years and
that after 10 years the remainder of the trust will pass
to Ben. The trust names no other beneficiaries. 5
years after the establishment of the trust, Alan and
Ben die.
Alans remaining 5-year income interest will pass
through Alans probate estate and Bens remainder
interest will pass through Bens probate estate.

Exception When Nonprobate

Property Passes Through the
Probate Process
When the designated beneficiary is the
decedents estate or the executor of the
decedents will.
Ex. Life Insurance - backup beneficiary

Probate Process
Produce the Will
Safe deposit boxes
Certified copies of the death certificate

Proving the will (self-proving affidavits)

Petition to Probate and confirm an Executor named in
the will OR appoint an Administrator
Letters of Testamentary/Letters of Administration
State of domicile and/or situs

Petitioner provides the court with:

The death certificate,
Names and addresses of all interested parties including
legatees/heirs and all known creditors

Probate Process Continued

Hearing is set
Notice is published and specifically sent to all
known interested parties and unknown parties
Creditors who do not file a claim against the estate
within a certain time (3-6 months, max 1 yr) may be
barred from any recovery
Statute of limitation begins running once published

Will contests
Appearance of new creditors

Will is filed in public records (Recorders Office)

Probate Process Continues

Personal Representative takes control of the decedents assets

Inventories assets and their value

Requests final payoff balances from all creditors and pays said debts
Court fees are paid
All federal and state income, fiduciary, gift tax and estate tax returns are
filed all subsequent taxes must be paid
Personal representative and all other court-approved advisors are then
All legatees or heirs are then paid (dont forget about Ancillary Probate)
Specific personal property bequests
Specific real property bequests to specific legatees
Residuary legatee

Final accounting is filed with the court

A petition to Discharge the Personal Representative is filed and
approved by the court
Probate Closes by official decree of the court

Probate in Virginia

Advantages of Probate

Will is validated
Executors actions are supervised
Disputes are handled by the court
Sensitive issues such as guardianship of minors
are decided by a third party if not otherwise
specified by the will
Inventory and valuation of decedents assets
and liabilities are carried out
Proof of legal title to real property is established
Deadline is set and enforceable against
creditors claims against the estate

Disadvantages of Probate
Property distribution takes time
Ancillary probate

Court costs and Administrative Fees may be based on
the size of the probated estate ($.10 cents for every $100
of probate property VA)
Attorneys fees

All claims and assets are a matter of public record

Big Brother decides!
Order of descent

Administration of Estates in VA
Spouse of deceased (or if none surviving, the
next of kin) makes initial decisions as to the
body, funeral (wishes of deceased is followed if
given in will), and interment before a fiduciary is
A person named Executor or Administrator has
no control over the assets of the deceased until
appointed by the probate court.
Executor de son tort = intermeddler

Appointment of Fiduciary to
Administer the Estate in VA
Corporations authorized to do business in
VA can act as a personal representative.
Administrator or executor no longer holds
their office where they:
Resign with permission of the court
Court revokes their authority from any cause it
appears proper

Duties of a Personal
Representative in VA
Collect assets of the estate, pay debts and
taxes due, and distribute the remainder
Must file inventory of assets and valuate
within 4 months of being qualification