Volume 18, Number 6
September 2001

ESTATE AND FINANCIAL PLANNING

Planning and Drafting from the Fiduciary's Perspective

By Marc S. Bekerman, Jo Ann Engelhardt, and Isabel Miranda

In some states, the probate process includes serving notice of the proceeding on both a decedent's intestate heirs and the distributees named in the will. Planners should obtain information about all of these persons during the drafting process. If a client does not know the names or addresses of his or her intestate heirs, the lawyer's next step varies among jurisdictions.

In states where a probate citation must be served on the intestate heirs after the testator's death, the lawyer may suggest an estate plan that limits the probate estate through the use of revocable trusts and beneficiary designations. In states where probate is less formal, this lack of information may have scant effect on the client's estate plan.

Lapsing bequests. Many state statutes include anti-lapse provisions, whereby the bequest will go to the intended beneficiary's descendants, if the intended beneficiary was related to the testator to the degree required under the statute. Anti-lapse statutes rarely apply to distantly related relatives or to friends, and may not apply to family members that are not related to the testator by blood or adoption. Finally, anti-lapse statutes usually apply only to wills. Of course, a document can override an anti-lapse statute and provide for alternative beneficiaries.

Titling assets. When conflicts arise between the will or trust and the title of an asset, generally it is because the drafting lawyer has prepared the instrument without a full review of the client's assets and assumed that all assets are held in the client's individual name (which would make them subject to probate and disposed of by the will at the client's death). But many modern assets are not subject to probate. Problems may also occur on a client's death if the value of some or all of the client's assets has changed substantially since the instrument was drafted.

Contractual obligations. Possible contractual obligations of a client, including prenuptial and postnuptial agreements, separation and divorce decrees, and charitable pledges, need to be considered. Many business interests are held in the client's individual name and would normally pass under the terms of the client's will. But a planner must determine, for example, whether the interest is subject to a buy-sell agreement. If so, the estate owns the right to receive the proceeds of the buy-sell agreement.

Real estate. Real estate has the predictable tendency to be affected by unpredictable swings in market value. For this reason, the planner should review the client's assets and values to ensure that the interest a beneficiary will receive continues to be in line with the client's desires.

In addition to market value volatility, the fiduciary has other concerns. If the decedent held the property in his or her name, the fiduciary must be especially concerned about potential environmental liability. The fiduciary should undertake appropriate due diligence before accepting the asset or perhaps should even consider refusing the appointment as fiduciary. If there is any concern about environmental liability, the client may want to hold the asset in a separate trust or in corporate form so that any remediation costs will not be a drain on the balance of the estate.

Joint accounts. Joint accounts with survivorship rights provide by their terms that the surviving owner will receive the account balance by operation of law. Thus, an individual cannot control the disposition of the joint account by will or trust. The exception is the "convenience account," in which an individual gives someone access to the account for the individual's benefit. At the individual's death, the account is part of the individual's estate. Although the typical estate of a married couple will include joint accounts, planners should discuss with their clients the advantages and disadvantages of survivorship rights.

Retirement accounts. Retirement accounts are usually not controlled by the owner's will or trust, but by a beneficiary designation. Although a discussion of the dispositive and tax implications of these designations is beyond the scope of this article, it is important to note that a spouse has rights and options available as the beneficiary that are otherwise not available.

The fiduciary must carefully review these assets. Litigation arises in some cases because a plan participant was married more than once and both the former spouse and the current spouse claim plan proceeds.

Dispositions of tangible personal property. Personal property will become part of the residuary estate if there is no specific provision or if the bequest lapses. The common law doctrine of incorporation by reference is of limited utility to estate planners, because in most states a document incorporated by reference cannot be changed after the client executes the will, unless the will is republished by the execution of a codicil.

Some states have created by statute a mechanism pursuant to which a testator may refer in the will to a separate instrument that specifically lists the bequests of tangible personal property. Even if the personal property is to pass to the residuary beneficiary, it is usually preferable to create specific bequests for personal property, since specific bequests do not carry out distributable net income to the beneficiary for fiduciary income tax purposes.

One common practice is a specific bequest of the property equally to each member of a class. However, if the members of the class cannot agree on a plan of distribution, the provision usually leaves the division of property to the fiduciary. Another practice is to give a class of items to a group of beneficiaries.

Tax apportionment clauses. When assets are transferred from an estate subject to estate tax, federal law applies to apportion tax regarding certain assets, and state law provides an apportionment scheme for the balance of a testator's assets. The testator can provide a plan for apportionment that will override the statutory plan. When the will is silent about tax apportionment, however, state law will govern.

Many wills have boilerplate tax apportionment clauses that direct all taxes to be paid from the residue of the estate, but a client generally selects those persons he or she wants to benefit most as the residuary beneficiaries. Requiring that the residue pay all the taxes will be particularly troublesome when an estate includes both probate and nonprobate assets or has both taxable and nontaxable beneficiaries and when asset values at the testator's death differ substantially from their values when the will was drafted.

In many states, the typical client's estate plan includes both a will and a revocable or irrevocable trust. The fiduciary's job is made more difficult if the drafting lawyer does not coordinate tax apportionment language between or among the various dispositive instruments. Powers clauses. It is imperative that the fiduciary be granted powers to address the particular circumstances in the estate. If a client owns real estate, it may be advisable to grant broad powers to the fiduciary, especially the powers to retain or sell the property, mortgage or encumber the property, abandon the property, and execute a long-term lease on the property.

If a client has an interest in a closely-held business, the fiduciary should be granted the following powers: to continue to run the business, without incurring personal liability; to liquidate the business; and to borrow to continue the business or to lend from business assets.

The powers granted to the fiduciary should be broad, so that the fiduciary is not limited to the terms of a conservative default statute. The following powers should be tailored to the specific client's needs: the right to remain undiversified; the power to employ and pay investment advisors, bookkeepers, etc; the power to borrow/lend securities; and the power to exercise stock options and to borrow to do so.

The fiduciary should be given the authority to allocate receipts and disbursements between principal and income, and to elect to take deductions against the estate tax return or the fiduciary income tax return without the need for equitable adjustments.

If the GST exemption is not allocated by the deadline for filing the estate tax return, a statutory default will allocate the exemption. To avoid this, the instrument should include language that allows allocation between testamentary and inter vivos transfers. It should authorize the fiduciary to treat beneficiaries differently. Further, the document should exonerate the fiduciary for allocation decisions except for gross negligence and give the fiduciary the power to create a reverse QTIP. The fiduciary should be granted the power to distribute assets in kind. Absent this provision, the estate, the trust, or the beneficiaries may face unnecessary income tax consequences.

Marc S. Bekerman is a vice president with U.S. Trust Co. in New York. Jo Ann Engelhardt is managing director of Bessemer Trust Company in Palm Beach, Florida. Isabel Miranda is a senior vice president with U.S. Trust Co. in New Jersey.

This article is an abridged and edited version of one that originally appeared on page 31 of Probate and Property, March/April 2001.

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