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© Copyright
Church, Harris, Johnson & Williams P.C. All rights reserved.
The Montana
Statutory Estate Plan
Estate Planning Tools
Wills
Trusts
Forms of Property
Ownership
Sole Ownership
Co-Ownership
Beneficiary
Designations
Transfer Taxes (Estate,
Gift, and Inheritance Taxes)
Federal Gift and Estate
Taxes
Montana State Inheritance
Tax
What is Probate
Trust and Estate Administration
1. Notice to and Payment Creditors
2. Estate Accounting
3. Inventory of Estate
4. Decedent's Final Income
Tax Returns
5. Estate Income Tax Returns
6. Estate Tax Return
7. Management of Estate Assets
8. Closing the Estate
9. Distribution of the Estate
10. Legal Procedure for Closing
the Estate
Trust and Estate
Litigation
THE MONTANA STATUTORY ESTATE PLAN
Decisions regarding handling every issue that comes up in the process of estate planning will be made as the result of death of every individual. The only real difference is who will make those decisions. Decisions consciously made by the decedent tend to be a lot better since they are tailored to that decedent's unique family and financial circumstances. To the extent a decedent neglects to make those decisions, then that decedent's "plan" will be the haphazard result of the ways that property was owned and the statutory plan set in place by the State of Montana under its intestate succession provisions. This rarely is the best plan. Consider, for example, the following "Will", the provisions of which are representative of the Montana statutory plan.
Those individuals who chose to create their own estate plans, rather
than rely on the State of Montana to do it for them, have a surprising
number of techniques available to them, including Wills, Trusts, Powers
of Attorney, beneficiary designations on insurance contracts or retirement
plans, joint tenancies, pay on death accounts and many more. No one of
these techniques is intrinsically better than any of the other techniques.
They are all simply tools, and proper estate planning is fundamentally
nothing more than selecting the right tool or tools to do the job. Selection
of the proper tools, though, requires an understanding of them and how
they work. Set forth below is a description of some of the basic estate
planning tools available and how they work.
WILLS
A Will is a written document that describes how you wish for your property
to be distributed following your death. A Will has no effect during your
lifetime. It can be amended or revoked at any time prior to death assuming
you are legally competent. To make a Will in Montana, you must be at
least 18 years of age and of sound mind.
TRUSTS
Trusts are commonly used in estate planning and can serve a number of useful functions. To create a trust, property is conveyed to a Trustee (which can also be the transferor in some circumstances) to be held and managed by the Trustee for the benefit of the trust beneficiaries according to the terms of the Trust Agreement. Trusts can be inter vivos (during life) or testamentary (under Will to be effective at death). Inter vivos trusts can be revocable (meaning the creator of the trust can amend or revoke the trust at any time prior to incompetency or death) or irrevocable (meaning the trust cannot be amended or revoked once it is created).
One of the most common types of trusts used for estate planning is a Revocable Living Trust. A revocable living trust is a trust created during a person's lifetime to hold all of his or her property. The creator of the trust (who is called the trustor) transfers his or her property to the trustee of the trust. The trustor generally names himself or herself as trustee of the trust and names an alternate to serve as trustee if the trustor is unable to serve. The trustee then uses the trust property for whatever purposes are specified in the trust document. Most likely the trustee will pay to the trustor all of the income of the trust each year. The trustee may also use any or all of the trust property for the trustor's benefit. The trustee may deal with the property as an individual deals with his or her own property (i.e. sell, transfer, etc.). The trustee is under a duty, however, to manage the property for the benefit of the trustor. Upon the trustor's death, the trust property will be distributed to the beneficiaries named in the trust agreement. In this manner, a revocable living trust essentially serves as a Will substitute.
Revocable living trusts have several advantages:
• One of the advertised benefits of a revocable living trust is that it avoids probate of the trustor's estate upon his or her death. Because the trust property is disposed of by contract (the Trust Agreement) upon the trustor's death, the trust property will not be disposed of according to a Will or by intestate succession. By avoiding probate, it may be possible to distribute assets to the heirs more quickly, attorney fees may be lower, and it is not necessary to file an inventory of the decedent's property with the court, where it becomes a matter of public record. However, as discussed below, probate in Montana is not overly burdensome as it is in some states like California. Therefore, while this is often a big selling point of revocable living trusts, it is not a particularly significant factor in Montana.
• Revocable living trusts offer security in that if the trustor becomes incapacitated, the successor trustee will step into the shoes and manage the assets for the incapacitated trustor. However, this same benefit may be achieved by having a durable power of attorney in place.
• The trust instrument can contain provisions for tax planning. However, this same planning can be done in a Will also.
Revocable living trusts also have several disadvantages:
• Probably the single biggest drawback of a revocable living trust is that all assets of the trustor must be placed in the trust for it to work. This means that all real property, bank and investment accounts and personal property of the trustor must be transferred into the trust. It has been our experience that very few clients successfully transfer all of their assets to their revocable living trust, so there generally ends up being a probate anyway.
• Many people have a difficult time dealing with property in their capacity as trustee of their revocable living trust. For example, it is hard to get used to writing checks in your capacity as trustee of your trust rather than in your own name, and titling assets you purchase in the name of the trust rather than your own name. Many clients make the mistake of acquiring assets in their own names instead of in the trust's name, and by doing so, they have defeated the purpose of avoiding probate.
• There are also larger "start up" fees associated with a revocable living trust. A revocable living trust is generally a more complicated document than a Will because the trust document must cover management and disposition of the trust assets during the trustor's lifetime as well as following the trustor's death. On the other hand, a Will only governs the disposition of property following death. Furthermore, in order for a revocable living trust to be effective, all the trustor's assets must be legally transferred into the trust at the time the trust is created, which involves additional time and expense.
• By having your assets in a revocable living trust, you do not avoid all expenses upon your death. It is still necessary to prepare estate, inheritance, and income tax returns and prepare deeds and other instruments of conveyance to transfer the property to your heirs.
Revocable living trusts work well for some people and not so well for
others. Church, Harris, Johnson & Williams, P.C. has extensive experience
in estate planning and drafting Wills and trusts and can help you decide
whether a Will or a revocable living trust is best for your individual
estate planning situation.
FORMS OF PROPERTY OWNERSHIP
Individuals may own property in a number of different ways. The form
of property ownership is important in planning an estate because it can
determine how that property is transferred upon the death of the owner.
The following is a discussion of various types of property ownership
and their characteristics as it relates to estate planning.
SOLE OWNERSHIP
Property owned in sole ownership is owned outright by one individual alone. If the owner has a Will, property owned in sole ownership will be distributed according to the Will upon the owner's death. If the owner does not have a Will, property owned in sole ownership will be distributed according to state laws which govern the disposition of property for those who die without a Will.
CO-OWNERSHIP
Property owned in co-ownership is owned by two (or more) persons. In Montana, there are two basic types of co-ownership: tenancy in common and joint tenancy with right of survivorship.
• Tenancy in common: When property is owned as tenancy in common, each co-owner (tenant) owns a percentage interest in the whole property. The ownership interests do not need to be equal among the owners. All owners have the right to occupy or possess the property. Each owner can dispose of his or her ownership interest by gift, sale, Will or otherwise without the consent of any of the other owners. Tenancy in common does not have the characteristic of a right of survivorship in the other owners. In other words, when one owner dies, the remaining owners do not automatically inherit the property.
• Joint tenancy with right of survivorship: Joint tenancy with right of survivorship is similar to tenancy in common in that each co-owner (tenant) owns a percentage interest in the whole property, the ownership interests do not need to be equal among the owners, and all owners have the right to occupy or possess the property. However, what distinguishes joint tenancy with right of survivorship from tenancy in common is the "right of survivorship," which means that when one joint tenant dies, all ownership interest in the property by the deceased joint tenant is lost. The surviving joint tenant becomes the sole owner of the property--regardless of what the deceased joint tenant's Will may have said.
BENEFICIARY DESIGNATIONS
Certain types of property may contain a beneficiary designation that specifies how the property is to be distributed upon the owner's death. Beneficiary designations are most commonly found on bank and brokerage accounts, life insurance policies, annuities, and retirement plans.
• Bank and brokerage accounts may contain a "pay on death" (POD) beneficiary designation and brokerage accounts may contain a "transfer on death" (TOD) beneficiary designation. The account owner controls the account while alive, and can change the beneficiaries at any time. Beneficiaries (and their creditors) have no rights to the account during the owner's life. Upon the account owner's death, the account proceeds are payable directly to the beneficiaries designated by the deceased owner and are not controlled by the deceased owner's Will.
• With life insurance policies, the persons named as beneficiaries in the policy will receive the proceeds of the policy upon the insured's death. The proceeds are not (generally) controlled by the insured's Will unless the estate or personal representative is named as the beneficiary of the policy. Annuities are similar to life insurance policies in that a beneficiary will generally be named in the annuity contract to receive any remaining annuity proceeds which are payable following the owner's death.
• Retirement plans such as a 401(k) plan, profit-sharing plan, or Individual Retirement Accounts (IRA) typically require the plan owner or participant to designate the beneficiaries who will receive any remaining benefits payable under the plan following the death of the owner or participant. The benefits are not (generally) controlled by the plan owner or participant's Will unless the estate or personal representative is named as the beneficiary of the retirement plan.
Property that is controlled by a Will is referred to as probate property. As indicated above, probate property generally includes property owned in sole ownership and property owned in tenancy in common. Property which is not controlled by the owner's Will is referred to as non-probate property, and generally includes property owned as joint tenants with right of survivorship and property which contains a beneficiary designation, such as POD and TOD accounts, life insurance policies, annuities, and retirement plans.
TRANSFER TAXES (ESTATE, GIFT, AND INHERITANCE TAXES)
As discussed above, one of the fundamental goals of estate planning
is to reduce unnecessary losses in the amount of property going to one's
family or other beneficiaries. It is critical to evaluate the potential
impact of taxes on the transfer of a person's property to his or her
beneficiaries as part of the estate planning process. If proper tax planning
is not done, the government may end up being one of the largest beneficiaries
of a deceased person's estate. Following is a brief discussion of the
various transfer taxes.
FEDERAL GIFT AND ESTATE TAXES
The federal gift tax applies to gratuitous transfers (i.e., transfers for which the transferor does not receive full and adequate consideration in money or money's worth from the person receiving the property from the transferor) made by a person during his or her lifetime. The gift tax is imposed on the person making the gift, not the person receiving the gift. The federal estate tax applies to gratuitous transfers made by a person at death, regardless of whether such transfer occurs by Will, revocable living trust, intestate succession, non-probate transfer, or otherwise. In this respect, it is very important to understand that just because an estate avoids probate does not necessarily mean that estate taxes will be avoided.
The federal gift and estate taxes are "unified" in that they apply to the cumulative amount of gratuitous transfers (i.e., transfers for which the transferor does not receive full and adequate consideration in money or money's worth from the person receiving the property from the transferor) made by a person both during his lifetime and at death. There are, however, some substantial gift and estate tax exclusions which permit a variety of planning opportunities:
• Perhaps the most important exclusion for gift and estate tax purposes is the unlimited marital deduction, which means that, as a general rule, a person can make gratuitous transfers of an unlimited amount of property to his or her spouse (as long as the spouse is a United States citizen) both during lifetime and at death without incurring any federal gift or estate tax consequences.
• Another important gift and estate tax exclusion is the applicable exclusion amount, which enables a person to make gratuitous transfers (both during life and at death) of up to $1,000,000 in aggregate value to persons other than a spouse free of federal gift or estate tax. Under the tax bill which was signed by President Bush in June 2001, the federal estate tax is repealed in 2010 and the applicable exclusion amount will increase to $1,500,000 in 2004 and then gradually increase to $3,500,000 by the year 2009. However, due to a quirk in the new tax bill which was designed to comply with budgetary limitations, the bill contains a "sunset" provision whereby the tax laws prior to the enactment of the bill are scheduled to return after 2010 unless Congress provides otherwise at some future time. This means that, absent further action by Congress, the federal estate tax is repealed only for those persons who die in 2010.
• A third exclusion which applies only to the gift tax is known as the gift tax annual exclusion, which allows a person to give any number of donees up to $11,000 each per year without incurring any gift tax consequences. Gifts in excess of the $11,000 annual exclusion are considered taxable gifts. Taxable gifts are first applied to reduce the $1,000,000 "applicable exclusion amount," so no gift tax is imposed until the total of all taxable gifts exceeds the applicable exclusion amount (which is currently $1,000,000).
As a general rule, only those persons whose estates exceed $1,000,000 in value face a potential estate tax problem. Estates less than $1,000,000 will be subject to the federal estate tax only if the deceased person makes taxable gifts during his or her lifetime which reduced his or her applicable exclusion amount to an amount less than the date of death value of his or her estate. Statistics show that only about 3% of estates are large enough to be subject to the federal estate tax. For those few estates, proper estate planning is critical in order to avoid paying unnecessary taxes. If proper planning is done, a husband and wife dying in 2002 can pass up to $2,000,000 (and even more under certain circumstances) to their children free of federal estate or gift taxes. If proper planning is not done, the amount passing tax-free to the children may be considerably less.
MONTANA STATE INHERITANCE TAX
For many years, Montana imposed an inheritance tax on the transfer of property at death to persons other than a spouse, lineal descendant (i.e., child or grandchild), or a stepchild. However, the Montana state inheritance tax has been repealed effective January 1, 2001; therefore, the inheritance tax does not apply to persons who die after December 31, 2000.
Probate generally refers to the process of disposing of property upon the owner's death. The estate administration process will be discussed in greater detail below, but first some basic facts regarding probate:
Probate procedures are creatures of state law. Therefore, each state has a different procedure. It is not safe or accurate (but it is extremely common) to generalize about the probate process based on the experiences of one state's procedures. Some states (for example, California) have quite cumbersome probate procedures. As a consequence, trusts are popular in California to avoid delay and expense. Other states (for example, New York) have more cumbersome trust administration procedures. Uniform Probate Code states--such as Montana--have very informal and flexible probate procedures.
Common Misconceptions--six common fallacies about probate (at least in Montana):
• Safe deposit boxes are not "frozen" at death.
• Bank accounts are not "frozen" at death.
• Court approval is not needed to buy or sell stocks, real property or anything else.
• There is no restriction against paying bills or dealing in any fashion with the deceased person's property, and no court approval has to be received first.
• Estates can be officially closed in 6 months, but property can be distributed from them to beneficiaries at any time before then if so desired.
• Attorney's fees do not run between 10% to 15% of the estate.
These figures are often given, but never seen in practice. They are
limited by statute in Montana to a general maximum of 3%--but, in
practice, for planned estates, are frequently less than 3%.
TRUST AND ESTATE ADMINISTRATION
Upon the death of any individual, certain administrative details must be completed. This is true whether the decedent made his plan by way of a Will, a Trust, by Montana's laws of intestate succession, or by way of any of the other tools available. In all cases, someone (whether that might be a Personal Representative, Trustee, Surviving Joint Tenant.....) must take steps to safeguard the decedent's property, ascertain and pay the decedent's bills, prepare an inventory of what the decedent owned as of date of death and its value, file death tax returns (where required), pay whatever taxes are due and ultimately distribute the property to the proper beneficiaries.
Church, Harris, Johnson & Williams, P.C. has an entire department devoted to trust and estate administration, with a staff of para-legals who work full time assisting in the administration of trusts and estates and with a complete schedule of deadlines, elections and other matters that must be attended to during the process.
To provide an overview of this process, the general estate administration
steps are outlined below. With variations, much the same process is followed
for the administration of trusts as well.
1. NOTICE TO AND PAYMENT OF CREDITORS.
The Personal Representative is required to publish Notice to Creditors, which gives creditors the opportunity to submit any outstanding debts of the decedent to the Personal Representative for payment. The Notice to Creditors must be published in a newspaper published in the county in which the decedent died. Creditors generally have four months from the time of the first publication of the notice within which to present their claim. A claim is deemed to be accepted unless the Personal Representative rejects the claim within 60 days after the expiration of the four month notice period.
It is the duty of the Personal Representative to make reasonable efforts to ascertain any debts (including contingent debts) owed at the time of death.
In addition to paying any debts owed by the decedent at the time of
death, the Personal Representative is required to pay ongoing costs associated
with the estate. This, for example, would include paying property taxes,
utilities, insurance, and other costs of maintaining the estate property
in good repair. The Personal Representative can also pay administrative
costs such as appraisals and court costs.
(See also Item 7, Management of Estate Assets)
2. ESTATE ACCOUNTING.
The estate is a separate legal and accounting entity. Further, the Personal
Representative is required by law to prepare an accounting which details
all receipts and expenses occurring during the period of administration
of the estate. Accordingly,
it is essential that all appropriate debts and administrative expenses be paid
out of estate funds, and that all estate income be paid to the estate. As such,
the estate in each case opens an estate bank account or accounts, in which
all estate income should be deposited and from which all estate expenses paid.
3. INVENTORY OF ESTATE.
Another primary duty of the Personal Representative is to prepare an inventory of the assets owned by the decedent at the time of death. Assets categorized into two general types: Probate Assets and Non-probate Assets.
Probate Assets are any items owned by the decedent in decedent's name alone, or in decedent's name with another person who has predeceased the decedent. These assets will go to the beneficiaries named in a Will or by the laws of intestate succession if there is no Will.
Non-probate Assets include any assets held by the decedent and not governed by the decedent's Will or Trust, such as assets held as a joint tenant with another person where that other person is still living. The property automatically belongs to the surviving joint tenant, regardless of what the Will says. Another non-probate asset would be life insurance proceeds or retirement plans, where the proceeds are payable to a beneficiary other than the decedent's estate. Proceeds from these assets do not need to be placed into the estate checking account. They do not belong to the probate estate, although they must nonetheless be counted in the decedent's taxable estate for death tax purposes. They belong to the surviving joint tenant(s), or in the case of life insurance, to the beneficiary.
It does not matter whether the assets are probate assets or non-probate assets as to whether they are includable on the inventory of the decedent. They are includable in every case in which the decedent had some sort of interest in these assets, even though the assets are not part of the probate estate. They must be inventoried and reported for estate tax purposes in any event. This also has some potential beneficial income tax consequences to the estate or the decedent's beneficiaries in that all assets reported for tax purposes then generally take cost basis equal to that reported value. This means that it directly will greatly reduce income tax liability later in the event that these assets are ever sold.
Within nine months after appointment as Personal Representative, a fair
market value inventory of all of the decedent's assets must be prepared.
This inventory is used to prepare the Federal estate tax return, if one
is necessary. It is the responsibility to provide a list of all assets
in which the decedent had an interest at the time of death, including
real property, vehicles, stocks and bonds, bank accounts and certificates
of deposit, mutual funds, insurance policies, annuities and pension plans,
co-op equities, and any personal belongings or collections of any value.
4. DECEDENT'S FINAL INCOME TAX RETURNS.
The Personal Representative is also responsible for seeing that the
decedent's final state and federal income tax returns are filed. This
is commonly done by the decedent's normal accountant if the decedent
had one.
5. ESTATE INCOME TAX RETURNS.
At the time of the decedent's death, a new taxable entity, the estate, comes into being. The Personal Representative must file state and federal income tax returns for the estate.
For the first taxable year of the estate, the estate has the right to
elect any taxable year end, so long as that year end does not extend
more than twelve months after the date of death. This permits great flexibility
in shifting income and expenses to different tax years for the overall
benefit of beneficiaries. All subsequent estate tax years shall be for
a full period of twelve months, with the returns being due three and
one-half months after the end of each taxable year. Due dates of the
various income taxable years are calendared as well.
6. ESTATE TAX RETURN.
A federal estate tax return is due within nine months from the date of death if the decedent's gross estate is valued at $1,000,000.00 or more. We will prepare this return for the estate, if one is necessary.
Once all of the appraisals in, an estimate of what the federal taxes
will be, if a return is required, can be prepared.
7. MANAGEMENT OF ESTATE ASSETS.
While the estate is open, the Personal Representative has the duty to preserve and manage the estate assets. This means that any liquid assets must be invested in a wise manner pending final distribution of the estate. The Personal Representative must also safeguard tangible personal property, keep the real property in good repair, and generally make decisions regarding the investment and safekeeping of all estate property. The Personal Representative is also responsible for collecting any interest, dividends, rents or other income of the estate, and depositing the income in the estate account.
Note that the Personal Representative's responsibilities extend only to probate
assets (see the discussion above on probate versus non-probate assets). The
Personal Representative is not responsible for property that was held by
the decedent as a joint tenant with a person who survived the decedent, nor
for life insurance or pension plans that are payable to a beneficiary other
than the estate. It is only the income from probate assets which the Personal
Representative is required to collect and deposit into the estate account.
The surviving joint tenant of any joint tenancy property is entitled to receive
any income from such joint tenancy property. Similarly, the named beneficiaries
of life insurance, pension plans or IRAs are entitled to receive the proceeds
from the policy, plan or IRA. One of the Personal Representative's important
responsibilities is to ensure that income from estate (i.e., probate) assets
is not commingled with income from non-probate assets.
The Personal Representative has the authority to sell estate assets (other than those specifically given to someone under the Will) if that would be in the best interests of the estate. The Personal Representative can sell assets without the approval of the court, unless the sale is made to that Personal Representative, that Personal Representative's spouse or an entity controlled by the Personal Representative. In that event, the Personal Representative would either need to have the consent of all interested parties, or to have the court approve the transaction. Of course, all sales have to be made in a reasonable manner.
It is permissible to distribute the decedent's property as directed
in the Will. It is not necessary to wait for the close of the probate
to distribute these items, though normally final distribution of all
assets will remain until final determination of death taxes or other
liabilities has been because the Personal Representative can be held
personally liable for such obligations if estate assets have been distributed
instead of being applied to estate obligations.
8. CLOSING THE ESTATE.
Under the Uniform Probate Code, it is not possible to close the estate informally (meaning simply filing closing documents with the Clerk of Court without need for judicial approval) before six months from the date the Personal Representative was appointed. This does not mean that the Personal Representative cannot pay bills and, in fact, make some distributions before that date. It is just that that is the first date on which the estate can be closed informally with the Clerk of Court.
As a practical matter, an estate is normally not closed or final distributions made until the Federal estate tax return has been file, if one is required, and the estate has received an estate tax closing letter from the Internal Revenue Service.
If a federal return is filed, it may take from six months to a year
after that return is filed to receive the estate tax closing letter.
Every estate tax return is reviewed by the Internal Revenue Service.
If there is any question, the return can be audited for accuracy of values,
discounts or other matters. If the audit of the federal estate tax return
presents any question, it may take longer take longer to close the estate.
9. DISTRIBUTION OF THE ESTATE.
Once the accounting is complete and the tax returns are filed and approved, the estate will be ready to be distributed. At that time, a final determination of the amount available after expenses and taxes for distribution. The Personal Representative will execute deeds for the real property, and instruments of distribution for the personal property.
There is a statutory preference for distributing all of the assets of
the estate in kind, though this is sometimes awkward with assets that
are not easily divisible. To that extent, it may be possible to liquidate
these assets, and distribute the cash in lieu of the property.
10. LEGAL PROCEDURE FOR CLOSING THE ESTATE.
An estate can be closed either formally or informally. A formal closing would involve a hearing in front of the judge, at which the judge would rule on the validity of the Will as presented, determine that the list of heirs and beneficiaries is correct, approve the accounting of the income and expenses of the estate, as well as the final distribution of the estate.
An informal closing would not involve a hearing. Normally, accountings for the estate must be presented unless waived. Waivers of an accounting must be signed by all heirs and devisees after an informal accounting is presented to them. When that is done, the Personal Representative simply files a sworn statement stating that all claims and all taxes have been paid, and that the Personal Representative has distributed the estate in accordance with the Will.
Surprisingly, perhaps, very few Wills or Trusts are ever contested in Court. When they are, the stakes are high, and the litigation differs from normal commercial contests in that overlaying all actions are the high standards required of all fiduciaries such as Personal Representatives of Estates or Trustees of Trusts. The stakes can be very high for the contestants of Wills (but not Trusts) as well, since if someone contests a Will and fails, that contestant becomes obligated to pay not only his or her own attorney's, but the estate's attorneys as well. This has been a hard lesson for many.
If fiduciary litigation over Wills, Trusts or their administration arises,
then it is important to engage counsel familiar with the rules and tax
and practical considerations that are peculiar to this sort of litigation.
Church, Harris, Johnson & Williams, P.C. has a number of experienced
trial attorneys in this area. Further information on this can be found
at.......
