Washington Estate Planning Law Blog : Washington Estate Planning Lawyer & Attorney : John Hugg Law Firm : WA Elder Law, Wills, Trusts : Seattle, Woodinville, Bellevue

Contrary to many people’s belief, your assets will not necessarily pass to the state if you don’t have a Will. In all likelihood, Washington State’s laws of intestacy will apply to pass assets to your heirs. Only if you have no heirs to receive your estate would your assets go to the state of Washington. In most circumstances an heir can be found. I was recently involved in a matter where much of the estate went to heirs located in Europe that the testator had never met. There are many reasons, however, why you might want to avoid this situation. If you want to make sure people you have never met do not receive your assets, a Will is very beneficial. Further, the intestacy laws will not help if you want a specific person to receive a specific asset, nor will they address estate tax or long term care issues; and, intestacy laws cannot ensure your minor children are taken care of by the person you desire. Those issues can only be addressed through a detailed estate plan captured in a Will, trust or both.

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The purpose of an executor is to administer a person’s estate according to the Will, or if there is no Will in accordance with applicable state law. In Washington State, generally any person age eighteen or over may act as an executor. The executor, also called a personal representative, is generally named in a person’s Will and is often a surviving spouse or other family member. In certain instances, the court requires the executor to post a bond to ensure performance of his or her duties and may require all actions to be approved by the court. To avoid the posting of a bond and the “intervention” of the court, a Will should specifically state that a bond is not required and the executor will have “non-intervention” powers. Of course, a determination should first be made that those waivers are appropriate, given the specific circumstances.

Your Will should also name an alternate person to act as executor if the first person selected is not able to act due to death or disability or is for any other reason unavailable. It is often best for the executor to be in the same geographic area. It can be a heavy burden to attempt to probate an estate from another state.

One concept used frequently is that of co-executors. Parents often want to name multiple children so as not to leave anyone out. This can be both a blessing and a curse. It can be good for a child to have a sibling’s support, but on the other hand disagreement can arise and cause unnecessary friction.

In Washington an executor is often required to undertake many of the following duties:

• Open the probate estate with the court
• File the Will with the court
• Obtain Letters Testamentary
• Provide various notices to beneficiaries, creditors and the State
• Locate heirs
• Determine estate assets
• Create an inventory of those assets
• Marshal all the assets of the estate
• Collect all income, such as rents, interest, and dividends
• Make demand for and collect all debts and claims due the decedent
• Complete pending lawsuits
• Represent the estate in a Will contest or other litigation
• Liquidate those assets that will not be specifically distributed to heirs
• Facilitate the distribution of various non-probate assets
• Maintain estate records
• Keep estate and personal assets separate
• Open a bank account for the estate
• Prepare and file state and federal inheritance, estate and income tax returns, if necessary
• Pay the obligations of the estate, including taxes and expenses of last illness
• Distribute the assets of the estate
• Collect receipts from the heirs, and
• Close the estate.

Generally, an executor is allowed “reasonable” compensation for his or her efforts. What is reasonable may not be so easy to determine and the court may have the final say. If the executor is a family member, such person may waive their fee in an effort to maximize the estate for all beneficiaries.

The role of the executor can be relatively simple or it can be very challenging depending on the complexity of the estate and the personalities of the family members. So you should choose your executor wisely and give him or her clear guidance in your Will.
 

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The Wall Street Journal ran an article recently about purchasing Will forms from various online or self-help services. The article has received criticism from some in the estate planning community. Here’s what I think people should understand about the estate planning process and where potential traps may lie.

The article outlines a couple with a non-taxable estate and no children, a house, life insurance and retirement accounts. The hypothetical couple apparently want to leave the house to the surviving spouse, one-half of the other assets to the surviving spouse and simultaneously leave the other half of the remaining assets to nieces and nephews. The author seems to feel this is a very simple situation. Of course, every one of my client’s believes their own situation is just as “simple.” However, after I meet with a client, and we discuss everything most say “Wow, I never knew it was so complicated.”

If Mr. and Mrs. Hypothetical want such an estate plan, I’d first ask why they want that specific plan. I’d mention that most married couples want their entire estate to pass to the surviving spouse, not merely the house and half of the other assets. The reason is simple – most spouses want to have as many resources, i.e., money and other assets, as possible for their future financial security. I’d probably recommend that the nieces and nephews only receive something if both spouses are deceased.

The next question could be, Should those nieces and nephews receive their inheritance outright or in trust? If they are minors and they receive the inheritance outright, their parent or guardian may control the funds for them until they reach age 18 or perhaps a guardianship or some form of conservatorship could be set up. At age 18, however, they are free to spend the money as they please. Most of my clients don’t want their children to receive their inheritance at 18 with no strings attached. A better alternative is some form of trust where there is guidance as to how the funds are invested and distributed to the beneficiary.

Another issue is the life insurance. Life insurance passes to the beneficiary designated in the policy, not pursuant to a Will. So if our hypothetical couple thinks part of the insurance proceeds will find its way to the nieces and nephews, it probably won’t happen. IRAs and 401k’s, as well as any type of account with beneficiary or payable on death provisions, also bypass your Will in most situations, unless your estate is the beneficiary. In many cases, you do not want your estate to be the beneficiary of such assets.

These are just some of the issues that would need to be addressed to produce an estate plan that truly meets the clients’ needs. So will the online estate plans accomplish what our hypothetical client desires? And, is want the clients want the best estate planning option? In all likelihood, the answer to both is probably no. But these clients wouldn’t know that without competent guidance.
 

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Executors are generally personally liable for estate taxes if they distribute property to beneficiaries before paying an estate tax obligation. And, according to at least one case, the executor may not discharge that personal liability in a later bankruptcy. Carroll v. United States, 2009-2 USTC par. 60,577 (May 6, 2009). In Carroll the estate elected to pay estate taxes on an installment basis. Over the years, the businesses inherited from the executor’s father performed poorly and the IRS installment payments stopped. During the same period, however, distributions from the companies were made to beneficiaries. The companies' poor performance ultimately lead to each of them ceasing business and personal bankruptcy for the executor.  The court stated the executor’s liability could not be discharged if there was a willful attempt to evade or defeat the estate tax. Because the executor knew of the tax, was aware of his personal liability for the tax, actively transferred property out of the estate without adequate consideration and demonstrated an intentional disregard for the liability the debt could not be discharged.

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CBS Money Watch has a useful guide for initial steps to take when a person dies - Death In the Family: 12 Things to Do Now. This is a good list to follow. The article also includes a link to a more comprehensive list of actions that an executor may need to take to administer an estate.

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In PLR 200937028, the IRS concluded that property held in an irrevocable grantor trust that was not included in the grantor’s estate at death does not receive a step-up in basis. Most individuals who own property in their own name at death receive a step-up in the tax basis of that property. For example, if you paid $200,000 for your home in 1995 and you die today with the house valued at $500,000 the tax basis increases to today’s value. Therefore, capital gain on the sale or future sale of the asset is either eliminated or minimized. However, if you transfer an asset to an irrevocable trust, even a grantor trust where the trust income is still taxed to the grantor, the asset is out of your estate and not eligible for a step-up in tax basis upon death. The beneficial trade off is that with the asset outside your estate, it is not included for estate tax purposes.

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These words seem self evident. However, in See v. Hennigar, Wash. App. 2009, the concept wasn’t so clear. In that case, a widow received a life estate in a farm from her late husband who died in 1984. A life estate is a form of property ownership that lasts for a set period of time, in this case the remaining lifetime of the widow. Under the husband’s Will, she had the power to sell, mortgage or convert the property. She remarried in 1989 and later executed a community property agreement, also referred to as a “CPA,” with her new husband. A community property agreement is a form of “Will substitute” that passes property directly to the surviving spouse and not pursuant to a Will, Trust or by operation of law.

After the widow’s death in 2007, both her new husband and the remaining beneficiaries of her first husband claimed title to the farm – her second husband under the community property agreement and the beneficiaries of her first husband under his Will. The trial court found in favor of the new husband on the basis that entering into the CPA had the effect of a sale of the farm from the widow as her separate property to her and her new husband as community property. Under the CPA, the widow’s community interest passed to her new husband when she died. However, the Washington State Court of Appeals reversed. The court stated, “[I]t is axiomatic that a person cannot convey a greater interest in real estate than she owns . . . [the deceased] simply could not transfer to the community a greater interest than she held.” The widow, owning a life estate, did not possess the farm in “fee simple.” Fee simple is generally viewed as absolute ownership of property with no time limit on ownership. Therefore, she could only transfer an estate that lasted for the duration of her lifetime. When her life ended, so did the estate she owned. A person cannot transform an estate for a limited period of time into an unlimited fee simple estate merely by signing a community property agreement (at least under these circumstances). The appellate court, in reversing the trial court, awarded the property to the beneficiaries of the widow’s first husband. This certainly seems to be the right result and meets with the well settled law that you can pass title only to what you own.
 

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In the last week or so, I’ve had multiple people ask me if having a Will allows one to avoid probate. In Washington, and to my knowledge in every other state, the answer is no. When a person dies all of her property is subject to probate. Probate is a legal proceeding that generally occurs in the county where the decedent resided. The general purpose of probate is to permit an Executor to take possession of the decedent’s property, preserve that property, pay all debts, claims and taxes, determine who is entitled to estate property and distribute that property. A Will is merely a document used to give guidance to the court and the Executor as to how to administer and distribute the decedent’s property. A court administered probate is also the only mechanism to give an Executor named in the Will the power to act on behalf of the deceased’s estate. Only by court order can an Executor named in a Will be granted the legal power to sell real property, deal with creditors, institutions and settle the estate. For a more detailed explanation of Executor duties please see my forthcoming blog post: Role of the Executor.

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