Milestones in the Probate Process

I previously wrote about “Understanding ‘Probate’ Terms” and “Why probate a Decedent’s Estate?” to set out a basic understanding of this thing called a court-supervised estate administration. This post sets out in some detail the actual steps in administering a typical decedent’s estate.

As I said in my previous post, estate administration has three main objects and phases:

• Collecting property and making reports;
• Paying debts and taxes; and
• Distributing property.

Generally speaking, in a court-supervised estate administration, things run something like this:

1. Some responsible person locates the original will and makes an appointment with the family attorney to begin the process.
2. The attorney, often having some knowledge of the decedent’s affairs and the situation, will prepare several documents to start the estate—a petition, court officer oath, designation of attorneys, confidential information submittal, order admitting will to probate, application for taxpayer number.
3. There is usually a conference among the attorney, executor, and/or interested family members to gather basic financial information, original will, sign documents. If the attorney did not have enough information to have the documents prepared, the attorney would adjourn the meeting, prepare the documents, and arrange with the necessary parties to get the documents signed. (The idea that there is a “reading of the will” is a mostly an invention of television and movies.)
4. The attorney files the original will and court documents mentioned above and seeks an order appointing the executor and admitting the will to probate. If the executor is not a resident of the state, this requires a judge’s review and approval, and the judge will order either the attorney or the clerk to serve as a “resident agent for service of process.” If there is no will, this step also includes getting a bond for the administrator set or waived.
5. The attorney applies for a taxpayer identification number for the estate.
6. The attorney arranges for publication of notice of estate administration in the newspaper.
7. The attorney electronically notifies Iowa Estate Recovery, which is charged with recovering any debt owed the state for Medicaid payments.
8. The attorney arranges for mailing of notice to the spouse, heirs, beneficiaries, and certain creditors.
9. If there is a surviving spouse and/or children, the attorney will prepare a notice concerning support payments.
10. The executor should be collecting, or at least identifying, the decedent’s property.
11. The executor should be notifying income payers of the estate’s taxpayer number.
12. The attorney and/or executor need to collect information on the date of death value of the decedent’s assets and liabilities. It should be noted that this can sometimes be a long and difficult process.
13. Within 90 days of appointment, the attorney will prepare and file a report and inventory of the estimated date-of-death value of the decedent’s assets.
14. The gross value of the decedent’s assets sets the statutory compensation available to the attorney and executor, and the attorney will prepare the compensation application, affidavits, and a proposed order allowing compensation to accompany the inventory. Often there will a waiver of compensation at this point because the executor is frequently a residuary beneficiary.
15. Four months following the second publication of the notice of probate in the newspaper, the period for filing claims against the estate and for challenging the will itself ends. At this time, the statutory liability imposed on an executor for distributions also ends. At this point, there begins the possibility for making distributions.
16. Within nine months of death, the executor must file the federal estate tax return and the Iowa estate or inheritance tax returns, if any such tax returns are due.
17. The executor collects the decedent’s personal income tax information, and the attorney or another tax preparer will prepare and file the decedent’s final personal income tax return. (Death and taxes… Whether you die on January 1 or December 31, April 15 always rolls around.)
18. Within 15½ months of death, fiduciary income tax return is due. This is typically the last thing that gets done in the estate administration.
19. Often, around the time of preparing the fiduciary income tax return, the attorney will prepare a final report. With the executor’s assistance, the beneficiaries receive a formal or informal accounting with the final report.
20. It is normal, at this point, for the executor, in consultation with the estate’s attorney to make distributions and to ask the beneficiaries to give a receipt for the distributions and a waiver of a hearing on the final report.
21. When the Department of Revenue gets around to it, it will review the decedent’s personal income tax and the fiduciary income tax returns. If the decedent and the decedent’s estate are all paid up and there are no issues, the Department of Revenue will issue an “Income Tax Certificate of Acquittance.” With this magical document in hand and having filed everything else with the probate court, the estate can be closed.
22. If the beneficiaries have provided “Receipts and Waivers,” the attorney files these with the probate court with the final report and acquittance. A “Probate Referee” then reviews the court file and prepares a report indicating whether the matters required by statute have been completed.
23. If the beneficiaries have not provided a waiver of a hearing on the final report, the attorney will ask the court to set a date and time for a hearing. The interested parties will then be notified. The final report typically would have a plan of final distribution. Interested parties could object and appear in Probate Court to ask for a ruling on the particular objection.
24. If the Probate Referee’s report is in good order and if waivers have been filed, the attorney can put the file in the hands of the presiding judge along with a proposed order for discharge of the executor.
25. After reviewing the file and settling any disputes if there has been a hearing, the Court will issue an order discharging the executor, which closes the estate.

Again, this is a general outline. Decedent’s estates vary dramatically in the scope of work and the time involved. Deadlines and timelines frequently are adjusted under the unique circumstances of each estate. There are also numerous matters that are not addressed here, e.g., will contests, claims against the estate, beneficiary disputes, insolvent estates, wrongful death claims, and dealing with “non-probate” property.

Estate administration can seem like a bit of a plodding process. Sometimes, there is the perception that “if I can’t see you doing something, it must not be happening,” but like many other legal matters, an estate administration has many moving parts that not everyone sees. If the tree falls and no one is there to see it, yes, it does make a sound — but unless you are tuned in, its fall may be imperceptible. Moreover, there is not going to be a tree falling every second of the day. Hopefully, setting out the nuts and bolts of what happens during administration of the decedent’s estate will aid understanding about parts of the process that occur both under the bright spotlight and behind the scenes.

Why Probate a Decedent’s Estate

“Will we need probate” is a question that comes up a lot. In this post, we will cover some of the reasons why we may (or may not) need to have “probate,” or this thing otherwise known as a court-supervised estate administration.

In my previous post, we covered some of the basic terminology relating to a decedent’s estate. Here, we get down to why we do what we do. The purpose of estate administration (whether a court is involved or not) breaks down into three main objects and phases:

• Collecting the decedent’s property (and making the appropriate reports to the court, taxing authorities and beneficiaries (or statutory heirs));
• Paying the decedent’s debts and state and federal income taxes and any estate, generation-skipping, or inheritance taxes owed; and
• Distributing the net balance of the decedent’s property to the intended beneficiaries (or the statutory heirs).

In other words, with virtually all decedents, someone needs to clean up the property and finances of the decedent. However, administering a decedent’s estate only part of the time requires probate court administration. What’s the difference? Quite frankly, the difference mainly lies in (a) the nature of the decedent’s property and (b) how the decedent owned or held the property.

There are certain ways of owning property that will almost always require that there be a court-supervised estate administration, and there are ways of owning property that usually will not require estate administration. Again, why? First the abstract answer: The integrity of our legal system of property ownership largely depends upon demonstrating the proper authority for collecting a decedent’s property and getting it to the right place. Without these rules, to put it somewhat immoderately, we simply have the rule of the strongest vultures.

A few examples will illustrate how the nature and the manner of holding property affect when and how court administration comes into play and, hopefully, make the “why” more concrete:

• If the decedent was the sole owner of stock in a publicly traded company (whether it is Google or ABC Widgets, Inc.), the shares need to be liquidated or transferred in kind to the beneficiaries. The company whose stock the decedent owned and its transfer agent obviously are not in business to decide who has the power to sell or reregister the stock or who gets the stock from the decedent’s estate. They want good documented authority of a person authorized to act for the decedent, and that comes in the form of a court-certified document (in Iowa called “Letters of Appointment”) that shows who has that power.
• If the decedent owned shares in a mom-and-pop construction company where there are two or three local owners and everyone knows the decedent, the secretary of the company may not require much proof of who inherits the decedent’s shares. It may be enough that the rightful beneficiaries or heirs provide a copy of the will or trust instrument and agree to indemnify the company against liability for making a transfer.
• If the decedent was the sole owner of an interest in land, the marketable title rules in Iowa dictate that an interest in land be conveyed by a personal representative. You could take a deed to that house you really like from any Tom, Dick, or Harry you might meet on the street, but how do you know you have the right to move in and occupy it and that someone else won’t come along and put you out? In most cases, getting a deed from that court-appointed personal representative is the answer either because the will specifically empowered the personal representative to sell the property or because the court actually approved the transaction.
• If the decedent owned an interest in land as a “joint tenant with rights of survivorship,” the law dictates that the remaining joint tenant receives the whole property interest, and no estate administration would be necessary to transfer the decedent’s interest in the land.
• If the decedent was the sole owner of stock in a publicly traded company held in a brokerage account that had a “pay on death” beneficiary named, the law again dictates that the beneficiary designation be honored and the whole property interest transferred to the beneficiary. The company managing the asset may have certain proof requirements (such as a death certificate) and new account forms, but no personal representative should be necessary.

With very small estates ($25,000 with no real estate), Iowa law also has a process for transferring assets by an affidavit. Iowa Code § 633.536 allows certain persons to supply certain information to the property holder. If the proper proof and information is supplied, the property holder is required to transfer the property and is protected from liability.

In future posts, we will get into the nuts and bolts of the process and the time involved in administering an Iowa decedent’s estate and some of the costs to be anticipated. The condensed overview of this is my firm’s website at singerlaw.com.

Understanding “Probate” Terms

Dealing with the death of a loved one is hard enough, but then you have to try to understand the foreign language of “probate.” Hopefully, the following will help the uninitiated translate these commonly used terms in an Iowa decedent’s estate.

An “estate” is basically the property and financial affairs left by the deceased person, and the deceased person is commonly called the “decedent.”

A “testate estate” is an estate in which the deceased person had executed a valid will.

An “intestate estate” is an estate in which the deceased person did not have a valid will. This might be because the deceased person never had a will, had a will and revoked it, or had a will that is not valid.

A “will,” of course, is a written document that disposes of the deceased person’s property by naming the persons entitled to take. A will may do other things, such as nominate the “personal representative” responsible for settling the deceased person’s affairs, specify how that personal representative can act in relation to the property and the court, nominate a person to care for the decedent’s children, and direct how certain property is handled in trust or how various taxes are paid.

“Probate” refers to the process of authenticating a deceased person’s will. It is often used as the catch-all term for what I prefer to call “estate administration.” In Iowa, the true probate process is relatively quick and easy. Usually, the attorney for the estate presents an original will to the clerk of court. The will is accompanied either by an affidavit of the deceased person and the witnesses showing that the will was properly executed or by the posthumous confirmation of the witnesses that the will was properly executed. The clerk of court or a district court judge looks these over and, in the absence of something terribly unusual, orders the estate opened and an executor appointed. These are, of course, subject to challenge if, for example, a later will is discovered.

“Estate administration” is the process of settling the affairs of a deceased person. This term is a better description for the process than “probate” as it describes the process that takes place whether the person died with a will or without. Estate administration is basically the winding down of the decedent’s financial affairs. This usually involves collecting the decedent’s property, paying the decedent’s debts and taxes, and distributing the property to the persons entitled to it.

“Personal representative” is the catch-all name for the party responsible for the estate administration. The personal representative is either a person or a bank with a trust department. There is a preference for an Iowa resident personal representative, but the estate’s attorney can usually find ways to have otherwise qualified non-residents serve. The personal representative is also a “court officer” who must swear an oath to execute the laws of the state in settling the decedent’s affairs and make a proper accounting.

In a testate estate, this the personal representative is more often called the “executor.” In an intestate estate, the personal representative is usually called the “administrator.”

A personal representative is sometimes also referred to as a “fiduciary.” That term describes a person who undertakes duties for and is responsible to others. The term fiduciary is often used to emphasize the higher responsibility of the personal representative and to distinguish this responsibility from other (particularly self) interests.

In Iowa, when the court orders the appointment of the personal representative, the clerk of court then issues to that person “letters of appointment,” which is the personal representative’s proof of authority. When dealing with companies in other states, we find that these are referred to by a variety of different terms. One generic description we often see is “certificate of official character.” One should note that whenever someone demands a “certificate” or a “certified copy” of one of these documents, the requesting party is looking for letters of appointment with the “certificate” of court personnel recently signed and dated and bearing the seal of the court to show that the personal representative is still in office and authorized to act.

There are a host of terms to describe the people entitled to the decedent’s property. The term “heir” is typically reserved for use in intestate estates, and it refers to the people identified by law to receive the decedent’s property. A “beneficiary,” on the other hand, is a person identified in a will to receive the decedent’s property. There may be “specific” gifts of a certain amount of money or property identified and paid out first. The “residuary” or “residue” is what is left over after specific gifts, debts, taxes, and expenses are paid. So, a “residuary beneficiary” is one of the people entitled to the residue. Occasionally, one still hears the terms “devisee,” which refers to a person entitled under a will to receive real property (land), or “legatee,” which is a person entitled to personal property (anything but land).

In subsequent posts, I will cover a bit more about the process and other topics like the estimated costs of estate proceedings. There is also an overview on our website at SingerLaw.com.

Beneficiary’s acquiesence in investments not a bar to later objection

The Iowa Court of Appeals released an opinion in In re the Thompson Trust (No. 10-0458/1-078, May 25, 2011), which is interesting for a variety of reasons, and one of them even relates to the law. Both procedurally and as relates to fees and costs, the case is hauntingly similar to Jarndyce v Jarndyce.

One thing interesting about Thompson Trust is that the trust has been in existence for 99 years. Another interesting thing about the trust is that it reportedly has $60,000,000 in assets.

Apart from these somewhat voyeuristic details, the trustee had annually sought approval of the investments of the trust. The trust investments involve a large concentration of stock in one banking company. The trustee apparently had provided reports “for decades” to both current and contingent beneficiaries. In 2007, Arabella Decker’s status changed from contingent to current beneficiary. In 2008, she objected to the trustee’s annual report.

The case is a surprising procedural tangle. The beneficiary, seemingly, took a shotgun approach with her objection. The appellate opinion is a bit vague on all of the details, but she included an objection relating to the concentration of stock. The Probate Court found in favor of the trustee and sustained a motion for summary judgment. The trustee had “asserted the Objector’s claims were barred by the doctrines of res judicata, consent and affirmation, estoppel by acquiescence, and laches.”

Judge Vogel, writing for the Court of Appeals, agreed that there was not much to argue about on the trustee’s past-year performance. However, the Court agreed with the Objector that: “These legal doctrines could not apply as each year’s activities could present an actionable cause, such as a newly found breach of fiduciary duty, wholly independent from the prior year’s activities. Therefore no beneficiary is precluded from year to year, raising an objection to the annual report, absent a showing that the same claim had been raised and litigated, or an activity had been consented to or acquiescenced [sic] in or a claim fell by the wayside for failure to timely object.”

On the other hand, knowing in 2007 the trustee’s intentions for investment in 2008, the beneficiary was barred from objecting in 2008 to those investments. Of course, the beneficiary could, and the Court determined that she did, object in 2008 to the investments going forward. On this issue, the Court remanded for further hearing.

Still more fascinating is that the district court docket shows that, while the case has been on appeal, the Probate Court already approved a petition to convert the trust from an income trust to a “total return trust,” a trustee policy, and a plan to reduce the concentration of stock. There is no appeal of that order. According to the Court of Appeals decision, the trust is scheduled to terminate in 2018 — I wonder if we will see on the appellate docket again?

Iowa has in place the Uniform Prudent Investor Act. Iowa Code §§ 633A.4301 et seq. Aside from basic investor prudence, the law dictates: “A trustee shall diversify the investments of the trust unless the trustee reasonably determines that the purposes of the trust are better served without diversifying.” Clearly, having the Probate Court approve the proposed investment plan in a report distributed to contingent and current beneficiaries alike each year was itself a prudent act.

ISU Foundation Syposium

The following are the questions posed and a summary of the answers provided for the ISU Foundation’s Second Annual ISU Faculty/Staff Symposium held on October 12, 2010 at the Gateway Hotel and Conference Center in Ames. Please note that the information here is of a general nature and not intended as legal advice.

Q: If no further action is taken in Washington in 2010, what will occur with Federal Estate Taxes in 2011?

A:  It might be helpful to know where we are at before discussing how the law will change. Congress passed this law called “Economic Growth and Tax Relief Reconciliation Act of 2001” (which tax wonks call “EGTRRA”). EGTRRA eliminated several of the top marginal rate brackets lowering them from 55 percent to 45 percent. EGTRRA also increased what we call the “exemption amount” over several years from $1,000,000 in 2001 to $3,500,000 in 2009 and then, of course, repealed the tax altogether for 2010.

For budgetary reasons, Congress put a sunset clause on EGTRRA that causes it to be repealed on December 31, 2010. So, estate, gift and generation-skipping transfer taxes will revert to the law that was in place on June 7, 2001. Several things will change, but there are a couple of things that are most noticeable and talked about: (1) the exclusion amount will return to $1,000,000 per person and (2) the top marginal tax rate will return to 55 percent.

Very roughly speaking, this means that couples with combined wealth of anything over approximately $2,000,000 will have potential exposure to paying federal estate tax, and individuals with anything over about $1,000,000 are going to be taxed. If that comes to pass, I think most people will go back to doing the kind of estate tax planning they were doing in the late 1990s. That means couples pretty generally would try to balance out their estates so that they would have roughly equal estates, if possible, and would look at setting up a credit shelter trust in their estate plans.

If you ask me to look into the crystal ball and tell you what is going to happen, I do predict that there will be a federal estate, gift, and generation-skipping tax on January 1, 2011. I would be very surprised if the repeal were made permanent. To me, the real questions are what will be the exemption level — will it be back at $1,000,000 or will it be returned to something like the $3,500,000 level we had in 2009? Will we continued to have a graduated tax rate and what will be the top rate — will we return to the top rate of 55 percent or will it be more like the 45 percent rate in effect in 2009? The proposals we saw this year were mostly centered around extending the $3,500,000 exemption and the 45 percent rate, but there were other proposals to raise the exemption higher and to lower the rate.

Another interesting thing will happen relating to how states collect transfer tax on death. In Iowa, we have an inheritance tax, and that tax exempts a spouse, children, and other lineal descendants. EGTRRA did away with something called the state death tax credit and replaced it with a straight deduction. Iowa had, then repealed, then re-enacted its own estate tax. Iowa’s estate tax is a “pickup-tax” designed to pick up the maximum amount that can be deducted from the federal tax. So, even if your estate plan left your estate free of the Iowa inheritance tax and if you owe a federal estate tax, you will be paying the State of Iowa an estate tax.

You may find this interesting as this issue is debated. IRS publishes statistical reports on estate tax returns. In 2001, there were 1,787 federal estate tax returns for all of the State of Iowa, and 616 of them had a tax. In 2008 (the latest year for which data are available), there were 457 federal estate tax returns and only 225 paid tax.

Update October 14, 2010: An audience member posed the question of the amount of the state tax credit. The amount of the credit is based upon a table published in the instructions for the federal estate tax return. The amount depends upon the value of the “adjusted taxable estate,” which is roughly the gross value of the decedent’s property less debts and expenses. According to the 2001 instructions, the credit is equal to a percentage that ranges from 0.8 percent at $40,000 to 16 percent on estates above $10,040,000. A taxable estate of $1,000,000 would have a credit of about $36,560 = [((1,000,000 - 840,000) * 0.056) + 27,600], where 0.056 represents the marginal rate on amounts over $840,000 and $27,600 is the credit for the first $840,000 of taxable estate.

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Q: What are the advantages and disadvantages of probate? Are there scenarios where you recommend avoiding probate?

A: Let’s make sure we are all on the same page about what “probate” means. When most people use the term probate, it’s a pejorative that means “tying up my money for endless jumping through costly hoops with the lawyer and the court.” Am I right? In reality it is an important tool for settling a person’s affairs.

A few things to keep in mind:

(1) When somebody dies, there is, without exception, a set of finances that needs to be cleaned up and shut down. (Notice I said “when,” not “if somebody dies.” We’re all going to die, and we need to think about what happens when we die.) So, I don’t care how careful your planning is or what form your planning takes, when you die, somebody will need to clean it up. Now, it is only a question of what form that clean-up takes.

(2) I call it “estate administration” rather than probate, because that’s what is happening — we are administering the finances of the deceased person, we are managing the assets and finances.

(3) Probate or estate administration is the process of using the court system to do the clean-up work and having a person appointed by the court to do that clean-up. As you probably know, that person (and this could also be a bank with a trust department) is called the executor (where there is a will), an administrator (where there is no will), or simply a “personal representative.”

(4) A probate or estate administration or any general “clean-up” after the death of a person is basically to fulfill three main goals: (a) collect the assets of the decedent; (b) pay the debts and taxes of the decedent; and (c) distribute the remaining assets to the people entitled to them.

(5) There is a lot of hype in places like California and Florida about the cost and difficulty of estate administration, and that hype bleeds back into the middle of the country. Now, that hype is largely justified in some of those snow bird havens, so if you are planning to retire there, you probably do want to avoid having your estate tied up in probate court. In Iowa, our court system is under a little stress from the financial crisis, but the system is pretty efficient and cost effective.

(6) Another thing to remember is to compare apples to apples and oranges to oranges. Everybody has different financial situations. So, please take with a grain of salt or, at least, a discerning ear, horror stories about different probate proceedings. Families who fight whilst the person is alive are going to fight when she is dead. The clean-up for people who have lots of real estate, business interests, stocks, and bonds is going to be dramatically different from the nursing home resident whose assets have been whittled down to a few CDs and a checking account.

So, what are the advantages of having a court-administered estate? There are a few:

(1) Generally speaking, when it’s done, it’s done — it puts an exclamation point at the end of the clean-up process, or a big red bow.

(2) With proper notices and Due Process, estate administration cuts off claims against the decedent and on the decedent’s property forever.

(3) Frequently, a personal representative can get things done that person not appointed by the court cannot get done or, at least, has a very hard time getting done.

(4) Depending on the type of assets and type of planning involved, there is a bit of analysis that one can go through about whether you “pay me now” or “pay me later.” Some advanced estate planning techniques mean money out of your pocket now, whereas when you are dead, you really can’t think about the costs. If you think about the time value of money, you might actually get a better deal having a court-administered estate. Keep in mind that there almost always is some form of clean-up work, so no matter how careful the planning, your estate is still going to have some costs.

So, what are the disadvantages of having a court-administered estate?

(1) Some people think that the costs are an issue. Iowa has, I believe, fairly modest probate fees. Again, places like California, Florida, and Texas have much higher rates, and people in the heartland seem to suffer some unnecessary anxiety because of things that happen in the coastal states.

(2) Some people think that time is an issue. In estate proceedings, we always tell the personal representative that there cannot be any disbursements within the first four months. Of course, certain types of property and certain forms of ownership can result in instantaneous transfer of property. Joint tenancy property and pay-on-death accounts get the property out to the beneficiaries very quickly. If you need the money, you are apt to think this is a big deal.

(3) Some people might think that there is very little privacy. The personal representative in a court-administered estate must file a “probate inventory” that lists the decedent’s property and the estimated values. The court record is open to the public for inspection. Generally speaking, however, I find that most people have better things to do than to while away their free time at the counter of the clerk of court’s office looking at probate files.

What are the scenarios where I recommend avoiding probate? I can think of a few:

(1) The first is when the finances are really simple and the clean-up work can be easily handled. This type of case is usually one of two situations: either (a) a spouse who has everything in joint tenancy ownership or (b) the person who has no real estate and only deposit accounts or retirement accounts or annuities.

(2) The second scenario is just the opposite: when the finances are really complicated, such as, when the client has real estate in two or more states.

(3) You want to ensure total privacy — no public records of anything. Trusts, for example, are quite good at preserving privacy.

(4) You want to have some sort of professional management or intergenerational controls on property. Trusts and corporate ownership of property can accomplish these goals.

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Q: How should an investor review the titling of their assets to ensure it transfers to their intended beneficiaries?

A: I counsel my clients to do a couple of things:

(1) Look at all of their assets and make sure things are consistent with the estate plan that they are telling me about.

(2) Understand that their will only controls some of their property and that their beneficiary designations on life insurance, annuity contracts, and retirement accounts need to be consistent; same for pay-on-death designations; and same for any joint tenancy property.

You can do a lot of estate planning — intentionally or unintentionally — by walking into the bank and adding a pay-on-death designation to an account. But, you really have to think about what you are doing. You have to think about how it affects your whole estate plan.

One situation that happens frequently is that the parent changes the ownership of a checking account to enable the child to write checks. Well, it is one thing to give a child check-writing authority, but it is an entirely different thing to make that person a co-owner of the account. This does not always go over well when there are other children and they find out that Sis gets the whole checking account that has $100,000 in it and the will says that they are to share equally Mom’s stuff. I don’t care if your child is 6 or 60, more often than not, they will have hurt feelings if they are not treated equally. Update October 14, 2010: One should also keep in mind that having pay-on-death designations on all of one’s accounts means that there may be no cash available for the personal representative to pay the funeral bills and costs of administration. This may lead to hardship for all beneficiaries because hard assets have to be liquidated.

Another thing I want to mention is that I have seen quite a few instances of clients that have pretty significant retirement savings, but maybe not so much in the way of liquid or disposable assets. Many people have the best of charitable intentions or a particular person they want to remember, but they really don’t have the assets to give now or it may make things hard on a surviving spouse to give assets at death. I have been telling clients that have these intentions to figure a percentage of their retirement assets to use and adjust their beneficiary designations accordingly.

If you already have a revocable trust in place, you want to make sure that you have your assets titled in the name of the trustee. In fact, I have opened estate proceedings for a decedent who had a revocable trust. Unfortunately, the shyster who sold this person a prefab, handy, dandy revocable trust package did not bother to get this person to sign a deed transferring the house to the trustee. So, review these things from time to time to make sure that something did not fall through the cracks.

One other thing about titling of assets. If you have out-of-state vacation property, timeshares, oil and gas interests, and the like, you would do yourself and your beneficiaries a big favor by making sure that these do not have to go through multistate estate proceedings. Sometimes you can do this by putting property in trust or in a corporate entity or by adding an additional tenant. This is where a careful review and good planning can save a lot of headaches for your beneficiaries later.

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Q: If no further action is taken in Washington in 2010, what will occur with Federal Income Taxes in 2011?

A: There are two major tax acts that are set to expire on December 31, 2010. One is “Economic Growth and Tax Relief Reconciliation Act of 2001” (or “EGTRRA”) and the other is called “Jobs and Growth Tax Relief Reconciliation Act of 2003” (or “JGTRRA”).

One report I read said that there are about 50 tweaks to the tax code that would go away. There are probably about three major things that the average taxpayer would most notice:

The first thing is that the tax rate structure will change. The lowest tax bracket will go from 10% to 15%. And instead of 25%, 28%, 33%, and 35%, we will have 28%, 31%, 36%, and 39.6%.

The second thing is that taxpayers filing jointly will notice a couple of changes. The brackets now cover twice as much income as they do for individuals, and this will contract to 167% of the individual brackets. The current standard deduction for couples is now double that of the individuals, and that will also shrink to 167% of the standard deduction available for individuals. That’s the so-called marriage penalty.

The third thing has to do with investment income and gains. The rate for long-term capital gains and ordinary dividends has been at 15%. Anyone who has a lot of investments will see some big changes here. The long-term capital gains tax rate will go from 15% back to 20%. Dividends paid to individuals will go back to being taxed as ordinary income, which means that the ordinary income tax brackets (the 15-28-31-36-39.6 rates) will apply depending on your individual bracket.

Again, if you are interested in tax policy, IRS publishes reports on income tax returns. In 2008, there were 1,415,088 federal income tax returns. Of those 28,096 reported an adjusted gross income of $200,000 or more. That’s 1.99 percent of returns.

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Notes

SOI Tax Stats – Estate Tax Statistics
SOI Tax Stats – Individual Income Tax Return (Form 1040) Statistics
Congress Delays Tax-Cut Battle Until After November’s Election (Bloomberg.com 9/23/2010)

Estate Tax Numbers from IRS

“Estate tax returns filed between 2001 and 2007: Between filing years 2001 and 2007, the number of estate tax returns filed fell significantly, from more than 108,000 to just over 38,000, due primarily to increases in the estate tax filing exemption enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. However, the number of returns filed for wealthy decedents, those with at least $3.5 million in gross estate, increased between the two years, from almost 9,500 to more than 14,200.The exemption amount for deaths in 2001 was $675,000, while the amount was $2.0 million for deaths in 2007.” Source: IR-2009-109.

Another estate tax bill

S. 2784, the Carper-Voinovich bill proposes to freeze the estate tax at 2009 levels, reaching estates above $7 million per couple or $3.5 million per individual. The rate would be 45 percent rate, adjusted annually for inflation. Press releases estimated three estates out of every 1,000 estates would be subject to the estate tax.

Probate and Trust Law Section meets

The Iowa Bar section responsible for setting priorities for probate and estate planning matters met on Friday 22 May in Des Moines. I think that the most interesting thing came not from anything on the agenda, but from the volunteered comments of an eastern Iowa attorney. That attorney reported being at a seminar where a Grassley staffer in attendance said that the federal estate tax exclusion amount and rates would be continued at the current level through 2010. He further said that it was this staffer’s opinion that it would be done as an one-year “extender” sometime in the middle of 2010 retroactively to the beginning of the year. The extension of current levels is consistent with what we have been hearing about Congress’s actions with budget resolutions in April. The extender in the middle of the next year means that the uncertainty will continue.

The section does not have any really big items on the agenda for the coming year. Most items on the agenda seem to be tweaking here and there. There are committees looking at the guardianship statutes and on revising the power of attorney statute.

Chief Justice Marsha Ternus addressed the section. She told the section to brace for more discomfort in the coming couple of years as the budget continues to be tight. “Technology is our friend,” she said, stating that she hoped that the judiciary would realize many new efficiencies with the implementation of the new electronic document management system.