by Lawrence R. Barusch

I. DEATH. Since You Can't Take it With You, What Are Your Choices?

Property owned outright by an individual dying without a will, will pass under the laws of intestate succession. Generally, the laws of the individual's domicile govern personal property and the laws of the situs of a parcel of real property govern its succession. While we generally discuss Utah law, bear in mind (i) Utah law may change between now and your client's death, (ii) your client may change domicile, (iii) if a married couple has contacts with a community property jurisdiction (e.g., California) opportunities for conflicts of law arise and (iv) real property outside of Utah will pass under different laws and require an ancillary probate. Only limited comfort should be taken from Utah's adoption of the "Uniform" Probate Code. Probate codes tend to be less uniform than, say, the UCC.

A. Intestacy (Title 75, Chapter 2, Utah Code Attached)

1. Spouse - 1/2 or All
If the decedent is married, the surviving spouse will take the entire estate, unless one (or more) of the decedent's issue are not issue of the decedent. Example: H and W are married for 40 years and have children. W dies. H marries A. A has no children. H dies. A marries B. A dies. None have wills. Of the property originally owned by H and W, half goes to their children. The other half goes to B.

2. Issue - "Per Capita at Each Generation."
The portion of the probate estate not passing to the surviving spouse is divided among surviving issue. First determine the oldest generation having at least one surviving descendant of the decedent. Divide the estate into the number of surviving members of that generation and deceased members leaving then living issue. Each surviving member gets a share. The remaining shares are combined and distributed among the surviving issue of deceased members in the same manner. Example: O dies, having survived her two children S and D. S left two children, SA and SB. D left three children, DC, DD and DE. If O died after June 30, 1998 each grandchild receives 1/5. If O died before July 1, 1998, SA and SB each receive 1/4 of the estate, while DC, DD and DE take 1/6.

3. Parents/Grandparents and Their Issue
If there are neither issue nor spouse, the estate passes (i) to the parents, (ii) the issue of the parents (i.e., siblings), (iii) the grandparents (half to the paternal, half to the maternal) or (iv) the issue of the grandparents (cousins). In the absence of such kin, the estate passes to the State of Utah for benefit of the state school fund. Prior to July 1, 1998 the estate passed to the kin in the nearest degree. Degree is counted up to the common ancestor and down. Example: If A's mother is B's cousin, A and B are kin in the fifth degree. However, if kin are of equal degree, the kin of the nearest common ancestor are preferred. No double dipping is allowed to those who can claim kinship in more than one way. Non probate transfers to a person decrease the recipient's intestate share.

4. Community Property Concepts
In many community property jurisdictions, community property received by a surviving spouse who dies intestate without issue is divided between the surviving spouse's heirs and the decedent spouse's heirs. Utah has no such concept. This is important to the client who tries to leave "everything to my spouse and then to my nieces and nephews." It is also important if there is property that may pass under the laws of another jurisdiction (e.g. the beach house in San Diego).

5. 120-Hour Survivorship
Generally, an heir must survive the decedent by 120 hours (5 days) to take under Utah intestacy laws. A similar rule applies in will construction (though this can be modified by an explicit provision in the will). This should be kept in mind, for example, in planning the By-Pass Trust.

6. Adoption; Illegitimates
An adopted child is the child of the adopting parent and not the natural parent, except a child adopted by the spouse of a natural parent is also the child of the other natural parent. A child inherits through his or her mother. A child inherits through his or her father if the parents married or attempted marriage before or after the child's birth. Paternity can be established by an adjudication before the death of the father, or thereafter by clear and convincing proof. A father who relies on adjudication can only inherit through a child if he supported the child and treated the child as his own.

B. Wills

A will of a decedent domiciled in Utah at the time of death will be governed by Utah law, except that, regardless of Utah law, the will is valid if it was valid under the laws of the place where it was executed, or of the domicile of the decedent at the time of death. You must check the laws of other states to determine whether a state will honor a Utah will (and, if so, how it will construe and apply the will) for non-Utah real property or if your client moves.

1. Age 18; Competency
A person must be at least eighteen years of age and of sound mind to make a will. Testamentary capacity is generally the ability to (1) understand the nature of her act, (2) understand and recollect the nature and situation of her property and (3) remember and understand the "material objects of her bounty."

2. Written, Signed, 2 Attestations
Except for holographic wills, which should not be used by estate planners, a will should be in writing, signed by the testator and signed by at least two witnesses. The three individuals should be together at the same time, and the testator should sign or acknowledge her signature in their presence.

3. Self-Proved Wills
If the proper forms are used (See § 75-2-504) and if a notary is also present and certifies the document the will is "self-proved." This avoids the necessity for calling a witness in the event of an uncontested probate.

4. Interested Witnesses
Witnesses must be 18, competent and disinterested. A disinterested party receives only his intestate share.

5. Choice of Law
See introduction to this section.

6. Waiver of Formalities
A Utah court may waive statutory formalities if there is clear and convincing evidence of the descendant's intent.

7. Revocation and Revival
A will is revoked by written instrument, destruction or divorce. A will is not revoked by marriage, but a new spouse omitted in a will made prior to marriage is entitled to her intestate share. However, gifts to children of a prior marriage are not reduced by the omitted spouse's intestate share. Destroying one copy of a will executed in duplicate revokes the will. Revocation of a second (or later will) usually would not revive a previously revoked will, but this depends on intent. Similarly, remarriage of divorced spouses may revive a will.

8. Incorporation By Reference; Tangible Personal Property
A writing in existence may be incorporated by reference in a will, but generally subsequent writings may not be so incorporated. Tangible personal property may be disposed of by a writing signed by the testator after signing the will.

9. Contracts to Make Wills; Joint Wills
Will contracts are governed by contract law, not the probate code. They are difficult to enforce, particularly as to waste and dissipation during the survivor's life. They can raise difficult gift and estate tax issues. Joint wills pose the same problems.

10. Simultaneous Death
The general rule is the testator is deemed to have survived the beneficiary (see 120 hour rule). Where two or more beneficiaries, or the survivor takes property, the property is divided in equal portions. There is no savings provision for spouses.

11. Abatement
When a will disposes of more property than remains after payment of debts, taxes and costs of administration, the devises abate. While the law provides rules, disputes often arise.

12. Ademption
If property mentioned in a will is sold before death, given to a devisee, given to another, or increased by accessions to that property issues of ademption arise.

13. Advancement
An advancement is property that is given to an heir as an advance of her intestate share. This also raises issues.

14. Anti-Lapse
If a devisee under a will predeceases the testator, her issue take if (but only if) she would have been an intestate heir.

15. Omitted Spouse; Elective Share
A spouse domiciled in Utah may elect to take against the will. She is entitled to one-third of the augmented estate. The decedent's probate estate is "augmented" by non-probate transfers. Non-probate transfers include most of the at-death transfers discussed below and outright gifts (other than to the surviving spouse) made within two years of death. The surviving spouse's property is also part of the augmented estate. Separate property (owned prior to marriage or received by gift or inheritance) is excluded. This amount is then deemed satisfied by the surviving spouse's property and amounts passing in probate or outside of probate to the surviving spouse. A complex computation is intended to provide that the surviving spouse has at least $25,000 (possibly her own money) after the decedent's death if the decedent's probate estate permits. Thus, if a husband and wife hold all property as tenants-in-common, the value of the property exceeds $50,000, and all property was acquired during marriage, a surviving spouse will receive nothing additional by making the election. However, the provision is so complex that it seems a virtual certainty that any spouse who elects will be involved in litigation. From the planner's standpoint, this provision boils down to a simple rule: be sure the spouse is satisfied with her share at the time you draft the documents. See revocation for when a spouse may take her intestate share (1/2 or all).

16. Pretermitted Children
Children born after the execution of a will generally take their intestate share. If a testator fails to provide for a child because she believes he is dead, he (if living) takes his intestate share. If the decedent provides for other children, the pretermitted child is limited to what the other children would receive.

17. Tax Apportionment
Statutory state law, common law and the Internal Revenue Code may affect whose share is charged with taxes. It is best to specify this in the estate planning documents.

C. The Testamentary Trust, the Revocable Inter-Vivos (Living) Trust, the Irrevocable Inter-Vivos Trust

1. Types of Trusts

a. Testamentary Trust
A testamentary trust is contained in and established by a will. The trust is generally established by court order, based upon provisions of the will, assuming that the will has been properly admitted to probate. A testamentary trust does not come into existence until after the death of the decedent and its formal existence depends upon the order of the probate court.

b. Living Trust
A trust may also be established during a person's life. This is an inter-vivos (during life) trust to be distinguished from the testamentary trust. A trust may be revocable or irrevocable. Irrevocable trusts are generally formed either for tax purposes or to avoid creditors. The latter motive is not always acceptable and that purpose is not always fulfilled. Absent tax concerns, estate planning trusts are revocable inter-vivos trusts, sometimes referred to as living trusts.

c. Establishing a Living Trust
To establish a trust, there should be a person creating the trust, (the settlor), the person or persons administering the trust, (the trustee), and one or more beneficiaries. The trust should be in writing, must have a valid purpose, and some property (not necessarily with large value) should be transferred. (Utah law has recently been amended to eliminate the requirement of funding, but other jurisdictions may retain the old rule).

d. Unfunded Trusts and Pour-Over Wills
Subject to the minimum funding requirement, a trust can be funded, or unfunded. An unfunded trust is often used in connection with a pour-over will. The will names the trustee as its primary residual devisee. The pour-over will/unfunded trust is in many respects the same as a testamentary trust. Formerly the pour-over will/unfunded trust, resulted in less court supervision than a testamentary trust. In recent years, the distinctions have been diminishing.

e. Life Insurance Trusts
A trust, whether funded or unfunded, can be designated as the beneficiary of a life insurance policy. The trust may but need not own the policy. The use of trusts with life insurance is generally tax driven, which we will touch on later.

2. Advantages of the Revocable Inter-Vivos Trust

a. Avoiding Probate Costs and Delays
There are significant court costs, legal fees and potentially fees for personal representatives involved with probate. Probate often involves significant delays. Over the last two decades, probates have become less costly and more efficient. Still many clients choose to avoid probate. A funded trust will avoid probate to the extent that it is funded. Note that an unfunded trust, as for example, a pour-over will/unfunded trust arrangement will not avoid probate and will not achieve any of the advantages discussed in this section. Unfortunately, many revocable trusts are sold, touting the advantages set forth in this section, but remain unfunded. As a result, the customer's expectations are disappointed, sometimes to the point where fraud is suggested. This has given revocable trusts a bad name. There is nothing wrong with a revocable trust, and indeed there are many advantages, provided that the client is fully advised concerning necessary actions, including funding during life.

3. Confidentiality
Probate proceedings are matters of public record open to the press and anyone who wishes to inquire. Generally the transfer of property by funded trusts following death is a strictly confidential matter.

4. Management
By centralizing the management of assets in a funded trust, the settlor is relieved of accounting and management burdens. This may also simplify tax reporting. It may also be easier to obtain investment management.
 

5. Supervising the Trustee
The use of a funded inter-vivos revocable trust allows the settlor to test out a trustee. If the trustee fails, another may be appointed. It also allows the settlor to give guidance to the trustee.

6. Incompetence
As individuals age, they may become more susceptible to deception. A revocable trust may be a solution. The individual may also simply become incompetent. While court proceedings for guardianship and conservatorship are less onerous than they were two decades ago, the revocable trust provides a mechanism for the discreet, confidential and non-degrading management of the assets of an incompetent.

7. The Second Spouse
By placing property in trust, it becomes less likely that property intended to go to a surviving spouse and then to the children will be diverted to a second or later spouse. For this purpose an irrevocable trust is obviously more effective than a revocable one. If a surviving spouse remarries, the new spouse will be entitled to her one third elective share of certain property as discussed above. A trust may avoid or reduce this problem.

8. Rule Against Perpetuities
While a trust provides a vehicle for the lengthy administration of property, the draftor must keep in mind the rule against perpetuities. Generally speaking any property interest must vest, if at all, within 21 years of a life in being at the date of the creation of the interest. The rule was modified in Utah effective July 1, 1998 to permit any interest in property that must vest less than ninety years after creation. Remember, the ninety-year rule has not been adopted in all jurisdictions and may not apply to interests created before July 1, 1998. Certain exemptions to the rule against perpetuities apply for the purposes of facilitating condominiums and retirement trusts.

D. Outright Inter-Vivos Gifts; Uniform Transfers to Minors Act

Outright gifts are the most straight-forward way of transferring wealth. Consider gift taxes. Consider the form of conveyance. If transferring real property, consider title insurance which may be lost on transfer. Outright transfers to minors may be made to a custodian for a minor under the Utah Uniform Transfers to Minors Act. The custodianship ends when a beneficiary attains age 21 if the gift was by will or an outright gift. Custodianships established to satisfy a debt or by fiduciaries without explicit authority in the underlying document may terminate at age 18.

E. Joint Tenancy

Property placed in joint tenancy passes to the survivor without probate upon proof of the death of the decedent. In the case of real property this is often accomplished by recording a copy of the death certificate, together with an affidavit of the survivor. Joint tenancy should not be confused with tenancies in common where the interest of the decedent tenant will be subject to probate. In community property states, remember that while passage of title on death is similar under community property in joint tenancy, there will be a step up of the entire basis of property held as community property on the death of the first spouse to die, while only the portion of the joint tenancy included in the decedent's estate for federal estate tax purposes will enjoy the step up if the property is held in joint tenancy.

F. Bank Accounts ("Payable on Death"), Securities ("Transferable on Death")

Utah, like most states, permits banks and similar institutions to offer "POD" accounts. On the death of one person, the POD account will be payable to another. Similar arrangements are available with United States Savings Bonds. Utah law provides similar arrangements for securities and stock brokerage accounts transferable on death ("TOD").

G. Life Insurance

The proceeds of the life insurance on a decedent's life are payable directly to the beneficiary without probate. Usually the proceeds are not subject to income tax, but if not paid to the surviving spouse, are generally subject to estate tax. Life insurance has multiple uses in estate and tax planning. It provides a source of liquidity for paying death taxes and other expenses.

H. Retirement Plans

Retirements plan benefits are contract rights and may be paid according to the terms of the plan. Many tax-qualified retirement plans require that benefits be paid as an annuity to the surviving spouse.

I. IRAs

As contract rights, amounts from IRAs can be paid directly to beneficiaries without probate. Tax concerns for larger IRAs are complex. As individuals and IRA customers become more sophisticated, it is becoming more common to draft the IRA beneficiary designation in a manner to include most of the provisions to be found in a well-drafted will or trust.

J. Powers of Appointment

This is the power to direct, in whole or in part, the manner in which certain distributions from a trust may be made. Particular care should be taken with powers of appointment with respect to the rule against perpetuities and estate and generation-skipping tax.

K. Life Tenancy, Beneficial Interests in Trusts

It is possible to convey real property to a person for life, remainder to another person. On the death of the life tenant, the transfer of the remainder to the survivor is automatic. Similarly under a trust, when one beneficial interest ends the next beneficial interest begins automatically.

L. Other Contract Rights

Utah law explicitly recognizes employment benefits, bonds mortgages, promissory notes, deposit agreements, pension plans, trust agreements, conveyances, or other contract rights to be transfers which do not require probate. A contract may provide amounts due a decedent will be payable to a different person after the decedent's death. Amounts owed to a decedent may be cancelled as a result of death. Separate instruments can be incorporated by reference. While these methods of transfer are not subject to probate, most are subject to estate tax and the election of the surviving spouse.

M. Living Wills and Durable Powers of Attorney

These devices do not transfer property. However they're often considered in connection with estate plans. The term living will generally refers to directions concerning the non-use of heroic measures to sustain life. Utah law explicitly authorizes living wills. Physicians who fail to comply with the directive or transfer care to a physician who will comply are deemed to engage in unprofessional conduct. Living wills do not eliminate difficult decisions for the family of an ill person, nor does the maker of a living will have an effective remedy if her instructions are ignored.

An ordinary power of attorney authorizes the holder to take legal action on behalf of a principal, but only while the principal is competent. Some states, under certain circumstances, authorize a durable power of attorney which continues the authority even though the principal may be incompetent (but only during the life of the principal). Laws on these instruments are not uniform and are subject to change. Utah does not explicitly recognize durable powers of attorney for handling property. Therefore, there can be no assurance the durable power will be effective. However, two factors makes these powers useable. Under common law, a third party is generally protected in dealing with an agent under the power of attorney as long as the third party has no actual knowledge of the principal's disability. Thus such powers may work in a "don't ask/don't tell" situation. Further, a number of states, including those where some stock transfer agents have their offices recognize durable powers of attorney. Thus is it often possible to effect a change in registration of securities.

II. INTERLUDE. Time Value of Money; Annuities.

A. Compound Interest

PV (1+i)n = FV

B. Remainders and Income Interests

PVremainder = FV (1+i)-n PVincome = FV - PVremainder = FV (1- (1+i)-n) and since Annual Payment (A) = i?FV PVincome = A?(1/i)(1-(1+i)-n)

C. Annuities: Reg 1.72-9

Tables V, VI, VIA attached

III. TAXES. How the Government Plans to Benefit From Your Demise.

A. Kinds of Taxes

1. Federal Estate Tax

2. Federal Gift Tax

3. Generation-skipping Transfer Tax

4. Federal Income Tax

5. Federal Excise Taxes

6. State Inheritance Tax

7. State Income Tax

8. Probate Fees

9. Transfer Taxes

B. Basic Federal Estate Tax

1. Rates

2. Unified Credit

1998 : $625,000
1999 : $650,000
2000 - 2001 : $675,000
2002 - 2003 : $700,000
2004 : $850,000
2005 : $950,000
2006 or thereafter : $1,000,000

3. Marital Deduction; QTIPs

4. By-Pass Trusts

5. Credit for State Tax

6. Credit for Prior Transfers

C. Basic Federal Gift Tax

1. Interaction Between Estate and Gift Tax

2. $10,000 Annual Exclusion

3. Husband/Wife Gift Splitting

4. Minors' Trusts

5. Crummy Powers

D. The Advantage of Paying Gift Tax Over Estate Tax

E. The Income Tax Basis Step-Up

F. Income Taxation of Trusts and Estates

1. Grantor Trusts

2. Distributable Net Income

3. Simple and Complex Trusts

4. Accumulation Distributions; Repeal

5. Income in Respect of a Decedent

6. Estate Tax Credit for IRD

G. The Generation Skipping Transfer Tax

1. Recognizing a Generation Skipping Transfer

2. Using the $1,000,000 Exemption

H. The Taxable Estate

1. Retained Life Estate

2. Retained Voting Rights

3. Transfers Taking Effect at Death

4. Revocable Transfers

5. Life Insurance (Incidents of Ownership, 5% Rule)

6. Gifts Within Three Years of Death

7. Powers of Appointment; Lapse; $5,000 or 5% Rule

8. Annuities; Repeal of Exclusion for Employee Benefits

9. Joint Interests; Husband/Wife and Others

I. Valuation Issues

1. Definition of Fair Market Value

2. Death or Six Months Valuation Date

3. Family Farms

4. Closely Held Business Interests

5. Blockage; Lack of Marketability; Minority Discounts

6. GRITS, GRATS, GRUNTS and Residence Trusts

7. Recapitalizations (Bail-Outs)

J. Charitable Strategies

1. Charitable Remainder Trusts; Annuity Trusts; Unitrusts; Pooled Income Funds

2. Charitable Lead Trusts

3. Planning With Charitable Trusts

K. Life Insurance and its Use in Irrevocable Trusts

L. Planning for Employee Benefits and IRAs

M. Taxation of Non-Resident Aliens