DIFFERENTIATING BETWEEN PROBATE and non-probate assets is critical. The easiest way to understand the difference is to determine if the property, through its titling or beneficiary designation, directs the distribution of the asset to its beneficiaries at the time of the owner’s death. Common probate properties include real property owned outright or as a tenancy-in-common, nonqualified bank or brokerage accounts not held in joint-tenancy, interest in corporations and other legal entities, jewelry and automobiles. Common non-probate assets include real property held jointly; life insurance (unless the decedent’s estate is the beneficiary); qualified retirement accounts such as IRAs, Keoghs, profit-sharing plans, pension plans and 401(k) plans; bank or brokerage accounts with a named beneficiary on the account; and beneficial interests in a trust account expiring at death.
Probate and non-probate assets together comprise the gross taxable estate. As noted last month, the estate planning team should prepare an overall analysis of all assets to increase the odds the ultimate distribution will match the client’s intent. A substantial portion of a client’s estate could be non-probate assets and be distributed to beneficiaries outside of the will. Accordingly, not having an accurate accounting of all assets may have negative effects on what may have been an excellent plan at the time of implementation. A detailed understanding of probate versus non-probate assets dovetails with a well-contemplated estate tax allocation provision in the client’s will.
For some clients, the estate tax allocation provision is the most important or the most complicated provision in the will. For clarity, reference here to a “will” includes any dispositive document that is a so-called will substitute, such as a revocable trust. It is imperative, therefore, the attorney communicates with the client about the flow of assets and estate tax consequences, and perhaps income and generation-skipping transfer taxes as well. Sometimes, however, attorneys who might spend considerable time discussing transfer taxes and how to reduce them will choose an estate tax allocation clause without conferring with the client. Even where tax apportionment is discussed, drafting oversights or mistakes can lead to negative results.
The estate planning team and the client need to first consider if all estate taxes, including those resulting from non-probate assets, should be paid from the residuary estate or if beneficiaries of non-probate assets and specific (pre-residuary) bequests should pay their share of estate taxes. Generally, the client’s intent is that beneficiaries of personal property and specific bequests receive such assets in their entirety without being reduced by estate taxes.
Additionally, where a client names both charitable and non-charitable beneficiaries of the residuary estate, the intent is for only the non-charitable beneficiaries to pay estate taxes.
If the attorney does not address estate tax apportionment, drafts the provision improperly or fails to consider all the taxable estate’s assets, it is possible the attorney instead of the client determines the dispositive plan. There is no significance to a lack of an estate tax allocation provision or having an incorrect one if a decedent’s estate is not taxable or if the beneficiaries of probate and non-probate assets are the same and share in the same percentages.
Much as a person who dies intestate is given an estate plan by applicable state law, so, too, with estate tax allocation clauses. If a decedent’s will lacks one, state law provides a plan, and the tax follows the asset. More often than not this results in the most equitable outcome, as compared with the residue of the probate estate paying the entire tax bill; however, it may not be what the client desires. The bottom line is every client with an estate subject to estate taxes should have and is entitled to an estate tax allocation provision that makes sense for the client and results in accomplishing his or her goals.
Read This Next
Leisure Lifestyle Awards 2018 Recap
Features
Sep 1, 2018All Reads on This Topic
Read Them All
Introducing
FX Excursions
FX Excursions offers the chance for once-in-a-lifetime experiences in destinations around the world.
#globility
Insta FeedDaily
Apr 19, 2024Rosewood São Paulo Now Home to Asaya Spa by Guerlain
Nestled within the sustainable Rosewood São Paulo, Asaya Spa by Guerlain offers a first-of-its-kind urban retreat. Designed by legendary Philippe Starck, the wellness destination delivers a creative opportunity for guests to achieve personal transformation while enjoying a luxurious getaway.
Sponsored Content
Why Buy Annual Travel Insurance?
One affordable plan can protect an entire year of trips: business or pleasure, short or long, domestic or international.
Daily
Apr 19, 2024The Iconic Bayeux Tapestry in France to Get New Home
Under the direction of the Town of Bayeux, France, in close collaboration with the French government, the Normandy Region and the Department of Calvados, the project to move the famous 11th-century Bayeux Tapestry to a new space has been approved.
Daily
Apr 19, 2024Turtle Bay Resort Partners with Salesforce
Turtle Bay Resort and Salesforce recently announced a partnership. Salesforce will help the O’ahu-based resort augment service agents with AI and personalize the entire guest experience. Salesforce’s Einstein 1 Platform will help the resort with its efforts to reinvent itself, heighten awareness of its offerings and establish new customer relationships.
Sponsored Content
Revel in a European Summer with AmaWaterways
Pedal through sun-drenched vineyards, hike amidst blooming wildflowers and take a refreshing dip in your ship's sun-deck whirlpool. Indulge in the flavors of the region with delectable dishes featuring luscious Wachau Valley apricots and succulent Serbian plums. As night falls, watch as the cities along the rivers come alive, pulsating with an irresistible electric energy. The sun-soaked days and vibrant nights offer a compelling reason to embark on an AmaWaterways river cruise during the upcoming summer months.
Daily
Apr 18, 2024Fort George Hotel & Spa Transforms Belize City from Gateway to Destination
Belize City is better known as a business center and a stop en route to Belize’s lush rural destinations, but Fort George Hotel & Spa promises to change things up and reframe the nation’s capital as a destination in its own right. Located in the city’s Fort George neighborhood, the hotel debuted as the first luxury hotel in Belize City, boasting sophisticated design, elevated culinary offerings, expansive guestrooms and an inspiring wellness program. The hotel also features a branded fitness center, plunge pool and K’IN Spa.
Amansara Review
eFlyer Reviews
Apr 17, 2024Regent Santa Monica Beach to Debut This Summer
Daily
Apr 17, 2024eFlyer News
Apr 17, 2024Icelandair, Expedia Launch New Rewards Program
Icelandair and Expedia officially partnered to launch a new rewards program. Travelers can now earn more rewards from bookings.
Sponsored Content
Reconnecting the World: GBTA Convention 2023 Spotlights the Vital Role of Business Travel and In-Person Connection
In an increasingly digital and interconnected world, the Global Business Travel Association (GBTA) Convention remains an indispensable platform for business travel industry professionals seeking to make the most of the power of face-to-face connections. Taking place August 13–15 in Dallas, the 2023 GBTA Convention provides the unique opportunity for professionals and companies to join visionaries, thought leaders and industry experts for meaningful networking, cutting-edge insights and inspiring innovation.
eFlyer News
Apr 17, 2024Swiss International Air Lines Begins New Service from Washington, D.C., to Zürich
Swiss International Air Lines recently launched daily flights from Washington, D.C. (IAD), to Zürich (ZRH). The daily flight is one of three new international routes SWISS launches this summer season, with Toronto (YYZ) and Seoul (ICN) slated in the coming months.
ShareThis