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What is a distributee and what do they mean for your estate plan?
A distributee is your legal heir that will inherit your estate, by law, if you do not have a valid will. A distributee may also be referred to as an “heir-at-law” or “next-of-kin.”

In New York, distributees are defined under EPTL § 4-1.1 to be (1) your spouse and/or children, (2) your parents, (3) your siblings/nieces and nephews/grandnieces and grandnephews, (4) your grandparents/aunts and uncles/first cousins or (5) your first cousins once-removed.

In New York, when you probate a will, you are required to give notice to a decedent’s distributees. Since distributees are the “natural” heirs of a decedent’s estate, this notice gives them an opportunity to dispute the validity of your will, if they believe there was any wrongdoing.

There could be many reasons why you choose to not leave your estate to your distributees —perhaps your closest living relative is someone whom you have never met, maybe you don’t get along with your family or maybe you simply want to contribute your estate to charity upon your death. Whatever the reason, it is important to speak with an estate planning attorney to make sure your wishes are documented and the proper steps are taken now, to avoid time delays and expenses after death.
What estate planning attorneys “need to know” about family dynamics
When Tom Petty died at the age of 66 from an accidental overdose, he had been considered a “success story” in the realm of celebrity estate planning as he had a full estate plan in place at his death.

For example, he apparently had a trust that disposed of his artistic property upon his passing through instructions to the successor trustee (his wife from a second marriage) to form a California limited liability company (“LLC”) to hold and deal with such property. As he had children from a first marriage, his trust apparently further provided that they should “participate equally” in the management of such LLC.

While such provisions seem to be well-meaning, they have apparently been the source of disagreement between Petty’s wife and children and have unsurprisingly resulted in recent litigation. From an estate planning perspective, they also call into question the extent to which family dynamics may have been taken into account in the planning process, especially when it is reported that Petty’s wife and children may have had a strained relationship during his life.

What can be done to avoid a family dynamics issue?

Regardless of a person’s celebrity, it is important that his or her estate plan take into account family dynamics as they may be when he or she is alive and in good health, as well as upon his or her death or in the event of a serious, long-term illness.

In particular, attention should be paid to family dynamics in the case of “blended” families where there is frequently tension between the spouse from a subsequent marriage and children of a first marriage. However, equal attention should be paid to all other types of family situations, such as adult children of the same marriage, as there is frequently tension in these situations too.

It is important to have an honest and open discussion with your estate planning attorney about how family members have traditionally gotten along and how you think they would get along when you are no longer there. It may be helpful also to discuss how family members have handled stress or grief, about how they have traditionally handled finances and whether you think that they are actually up for handling additional responsibilities, such as taking care of you or managing your finances. You should also think about whether it would be better for a few family members to work together or one family member to be in charge.

Finally, you should inform your estate planning attorney of any significant relationship or marital issues between family members, of any mental illness or of any substance abuse issues, so that your estate planning attorney may tailor his or her recommendations to achieve your estate planning goals and hopefully provide your loved ones with a more harmonious structure upon your incapacity or passing.
Joint ownership in real property — What happens at death?

There are three ways to own title to real property between two or more individuals—as tenants in common, joint tenants or tenants by the entirety. How you hold title to real property with another individual is important when it comes to your estate plan and knowing what will happen after death.

Tenants in common: Each owner has a separate interest in the property. If the type of ownership is not expressly stated in the deed, and the parties are not husband and wife, this creates ownership by tenants in common. Upon the death of an owner, his or her share passes pursuant to the deceased’s will, or if there is no will, to the deceased’s heirs via intestacy laws.

Joint tenants: A joint tenancy must be specifically declared in a deed. Upon the death of a joint tenant, his or her interest automatically passes to the surviving joint tenant. This tenancy may also be referred to as “joint tenants with right of survivorship.”

Tenants by the entirety: This type of ownership is unique to married persons. Upon the death of a spouse, the property becomes owned in full by the surviving spouse. The deed should state that ownership is by “tenants by the entirety” or between “husband and wife,” although if it is silent and the parties are legally married at the time, the ownership will be automatic. Alternatively, married persons can own property as joint tenants or tenants in common, provided it is expressly stated in the deed.

Unclaimed funds — What are they and how do I collect?
Unclaimed assets are funds in an individual’s name such as bank accounts, stocks, federal or state income tax refunds, uncashed dividends, insurance premium refunds, etc. that have not been accessed or collected [a year or more after issuance] that will eventually escheat to the state as “Abandoned Property.”

We commonly see the following types of Abandoned Property: uncollected dividends, forgotten bank accounts, uncashed checks and contents of safe deposit boxes.

If unclaimed funds are located in your name, only you, your spouse (or other family member if none) or your estate is entitled to collect the money from your state’s unclaimed funds depository.

There is no central federal source to research unclaimed funds specific to you. However, the National Association of Unclaimed Property Administrators website has helpful information on each state and provides instructions on how to search for unclaimed money in your name and corresponding state.

We recommend you search the Abandoned Property website of each state in which you have resided annually. The collection process is relatively simple and most times can be done online through the National Association of Unclaimed Property Administrators, Office of the New York State Comptroller Unclaimed Funds, Massachusetts Unclaimed Property Division and Illinois State Treasurer’s Unclaimed Property websites.
The importance of elective share statutes in “I love you not” wills
It is common for a married individual to fully provide for a spouse under his or her estate plan and to execute what is called an “I love you” will.” However, it sometimes happens that the married individual does not bequeath property for his/her spouse, often because he or she has children from a previous marriage and wants to leave family property to them. State laws generally do not favor disinheriting a spouse and may allow the surviving spouse to claim a portion of the decedent spouse’s property despite the provisions of the will. Absent a pre- or post-nuptial agreement addressing parties’ interests in each other’s property at death, “Elective Share” statutes can prevent a spouse from being disinherited under the decedent’s estate plan. A recent Massachusetts Supreme Judicial Court opinion underscores the importance of elective share statutes when individuals do not provide for a surviving spouse.

What are Elective Share statutes?

Elective share statutes generally allow a surviving spouse who has been disinherited by the deceased spouse to claim a fixed portion of the decedent’s estate (elective share), and in so doing, circumvent the decedent’s wishes. The purpose of elective share statutes is to allow a measure of financial protection to the surviving spouse, saving him or her from destitution.

Each state sets its own rules, and many states provide that the size of the elective share depends upon whether the decedent left issue (i.e., children, grandchildren) or parents. For example, New York allows a surviving spouse to claim the greater of $50,000 or 1/3 of the estate while Illinois allows a surviving spouse to claim 1/2 of the estate if the deceased did not leave issue but only 1/3 if the deceased left issue. In comparison, Massachusetts sets out a complicated matrix that depends on the degree of kinship of the other surviving relatives and the type of property left by the decedent. Some elective share statutes, such as Illinois’s, limit a surviving spouse’s claim to probate property; others, such as that of Massachusetts, include certain non-probate property, such as a decedent’s revocable trust.

Massachusetts’ Elective Share Statute

Where a decedent leaves issue, the Massachusetts elective share statute allows the surviving spouse to claim an interest in 1/3 of the deceased’s personal and real property. To the extent that the value of the 1/3 exceeds $25,000, the electing spouse will receive $25,000 outright and an interest in the remainder of the 1/3 share.

In a case decided in January 2019, Cianci v. MacGrath, SJC-12531 (Mass. Jan. 8, 2019), Massachusetts’ highest court determined the exact nature of the surviving spouse’s interest in that remainder of the 1/3 share. In this case, the decedent’s family consisted of a wife and adult children from an earlier marriage and his property consisted of three parcels of real estate. The case does not mention whether the couple had established a pre- or post-nuptial agreement, which could have determined the parties’ interests in each other’s property at death. The husband’s will made no provision for his wife and his real estate was bequeathed to his children. Not surprisingly, the wife elected against the will and then sought to force the sale of the real estate. Not surprisingly, litigation followed. The ultimate ruling was a toss-up: the Massachusetts Supreme Judicial Court determined that the wife has a life estate in the real estate subject to the 1/3 share, that she can seek division (partition) of the property to settle her share and that she is entitled to compensation for the value of her interest in any property that had already been sold.

What if you do not wish to fully provide for your spouse under your estate plan?

You should not assume that you can disinherit your spouse. If your estate plan does not provide at least as much for your spouse as your state’s elective share statute provides, your spouse could have a state-sanctioned override. You should consult with your estate planning attorney to determine your options and your spouse’s rights.
Proposed IRS regulations issued to address when lifetime exemption differs from estate exemption
The Tax Cuts and Jobs Act of 2017 (TCJA) provided for a substantial increase in the estate and gift tax exclusion amount, effective for the years 2018 to 2025. The TCJA did not specify whether taxpayers who made gifts during this eight-year period would enjoy the benefit of the higher exemption levels after 2025, or clarify other technical issues.

On November 21, 2018, the IRS issued proposed regulations that provide that there will be no “clawback” imposed upon taxpayers.

What would happen under the proposed regulations?

Under the TCJA, the exclusion amount used to compute federal and estate gift taxes increased to $10,000,00 (as adjusted annually for inflation; $11,400,000 in 2019) and will revert to $5,000,000 (as adjusted for inflation) on January 1, 2026.

The proposed regulations provide that gifts made during 2018 through 2025 in excess of the reversion amount are sheltered from the estate tax. There are other technical corrections sheltering certain pre-2018 gifts. 

What is the plan for the proposed regulations?

IRS has invited public comments on the proposed regulations and has scheduled a public hearing on March 13, 2019.

The proposed regulations will not take effect until the final regulations are issued.
2019 Estate, Gift and GST tax exemptions announced by IRS
Effective in 2012, the amounts that a U.S. citizen or resident can transfer to another individual free of estate, gift or Generation-Skipping Transfer taxes (collectively, the “transfer taxes”) have been set at a base amount, which is subject to an annual adjustment for inflation.

What is the transfer tax exemption for 2019?

On November 15, 2018, the IRS announced that the 2019 transfer tax exemption amount is $11,400,000 ($10,000,000 base amount plus an inflation adjustment of $1,400,000).

The tax rate applicable to transfers above the exemption is currently 40%.

What is the gift tax annual exclusion amount for 2019?

The gift tax annual exclusion allows taxpayers to make certain gifts without eroding the taxpayer’s lifetime exemption amount. The gift tax annual exclusion in 2019 remains $15,000 per donee.

What payments are excluded from the annual and lifetime gift tax exemption?

A donor may exclude from his annual and lifetime gift tax exemption all gifts to his/her spouse as long as the spouse is a U.S. citizen, payments of tuition made directly to the donee’s educational institution and payments for medical expenses (including medical insurance) paid directly to the donee’s medical or medical insurance provider.

There is a separate gift tax annual exclusion for gifts to spouses who are not citizens of the United States: that amount is $155,000 in 2019.

Are the current high transfer tax thresholds permanent?

The Tax Cuts and Jobs Act, which was enacted in December 2017, provided that the current $10,000,000 base exemption amount for the estate, gift and Generation-Skipping Transfer taxes is effective through 2025, and reverts to the $5,000,000 base exemption amount established by the American Taxpayer Relief Act of 2012 on January 1, 2026.  Both exemption amounts are subject to an inflation adjustment. 

How has the federal transfer tax exemption amount changed over the years?

The transfer tax exemptions (and the highest marginal transfer tax rates) have undergone several sweeping changes in the last two decades. The exemption amounts have been fully unified only since 2011.

Since 1997, the estate, gift tax and Generation-Skipping Transfer tax lifetime exemption amounts have changed as follows:

                                             Estate & Gift*                GST lifetime
                                             lifetime exemption:      exemption:
                    1997                  $600,000                        $1,000,000
                    1998                  $625,000                        $1,000,000
                    1999                  $650,000                        $1,010,000
                    2000                  $675,000                        $1,030,000
                    2001                  $675,000                        $1,060,000
                    2002                  $1,000,000                     $1,100,000
                    2003                  $1,000,000                     $1,120,000
                    2004–2005*      $1,500,000                      $1,500,000
                    2006–2008*      $2,000,000                      $2,000,000
                    2009*                $3,500,000                      $3,500,000
                    2010*                $5,000,000**                          ***
                    2011                  $5,000,000⁑                    $5,000,000
                    2012                  $5,120,000                      $5,120,000
                    2013                  $5,250,000                      $5,250,000
                    2014                  $5,340,000                      $5,340,000
                    2015                  $5,430,000                      $5,430,000
                    2016                  $5,450,000                      $5,450,000
                    2017                  $5,490,000                      $5,490,000
                    2018                  $11,180,000⁑⁑                $11,180,000
                    2019                  $11,400,000                    $11,400,000

Notes:
* Between 2002 and 2010, the lifetime exclusion for gifts was capped at $1,000,000.
**In 2010, estates had the option to choose between a “no estate tax” system that afforded limited step-up in tax cost for the decedent’s assets, or a $5,000,000 federal estate tax exemption with full step-up in tax cost.
***In 2010, the GST tax exemption was $5,000,000, but the GST tax rate was 0.
⁑ The American Taxpayer Relief Act of 2012 set a base amount of $5,000,000, subject to inflation.
⁑⁑ The Tax Cuts and Jobs Act set a base amount of $10,000,000, subject to inflation; the Act provides that the base amount sunsets and reverts to prior law effective January 1, 2026.

What does this mean for you?

The changing landscape of the federal transfer taxes has led to challenges and opportunities in estate planning. In view of the recent changes and the scheduled sunsetting of the estate, gift and Generation-Skipping Transfer tax exemption amounts, please consult with your Nixon Peabody LLP attorney about your estate plan.
What documents should you keep after a person’s death?
If you are the personal representative or executor of a person’s estate, you will need to sort through the deceased person’s belongings and distribute his or her personal property to the people named in the deceased person’s will or a separate personal property memorandum.

While certain items of a deceased person’s belongings, such as jewelry, photographs, paintings, silverware, china and furnishings, may be more straightforward to distribute because they are items that family members would like to receive due to monetary and sentimental value, other items, such as financial statements, insurance policies, utility bills and tax returns, may be less straightforward.

What documentation should be kept?

As estate administration attorneys, we recommend that the following documents be kept:

          • Original birth and death certificate (both for the deceased person and any predeceased spouse);
          • Original marriage certificate, prenuptial agreement and decree of divorce;
          • Original stock, bond and other asset ownership certificates;
          • Income tax returns from the past three years and supporting documents (e.g., Form W-2, Form 1099, Form 1099-R, receipts for charitable deductions, etc.);
          • Gift tax returns;
          • Estate tax returns for a predeceased spouse;
          • Check registers, bank account statements, retirement account statements, credit card statements, medical statements and utility bills for the year of death (and for any prior year for which the decedent has not filed an income tax return);
          • Retirement plan documents (e.g., pension paperwork, annuity contracts, etc.); and
          • Insurance documents (life insurance policy, homeowners’ insurance policy/umbrella coverage, etc.).

What to do if you are unsure if a document should be kept?

As a general rule, if a document that is not named on the above list looks important, it is better to save it than throw it away. If you are unsure about whether you should keep a particular document, you should send it to your estate administration attorney who can review it and advise you on how to proceed.

How long should these documents be kept?

With the exception of birth certificates, death certificates, marriage certificates and divorce decrees, which you should keep indefinitely, you should keep the other documents for at least three years after a person’s death or three years after the filing of any estate tax return, whichever is later.

What should be done with the remaining documentation?

Once you sort through the deceased person’s papers and set aside the above documents, you may be left with a pile of papers. Generally, it is a good idea to shred documents that have any personal or financial information on them to lessen the risk of identity theft.

If you do not have a shredder or the volume of papers is such that it would be impractical to shred them at home, you can hire a document management company to pick up the papers and securely shred them at an offsite facility. The cost of hiring a document management company is generally a reimbursable expense of the estate.
Executors: avoid making these mistakes
Even the best-laid estate plan can leave an executor overwhelmed by the amount of work involved in administering an estate. An informed executor is better able to navigate this process. Listed below are common mistakes executors make.

Not keeping accurate accounting records. An estate becomes its own entity, with its own tax ID, upon the decedent’s death, and should have its own bank account for financial purposes. Executors should not comingle personal funds with the estate. The executor has a duty to account for the estate’s cash flow. Consider using a computer spreadsheet or bookkeeping software for larger estates as a checkbook register may not be sufficient.

Not picking up the mail. Have the post office hold the mail (or have it forwarded) so you don’t miss important pieces of mail. A growing stack of mail at the decedent’s residence may be an invitation to criminals and vandals that the premises are vacant and unattended.

Losing track of tangible assets. As soon as possible, take an inventory of the deceased person’s assets and personal belongings to get an account of the entire estate. Having a record of these assets can help ensure that valuable items don’t disappear.

Paying bills too quickly. Understand the priority of payments that need to be made. A spousal or child award, if warranted, takes priority over creditors. Paying creditors too soon, or in the wrong order, may leave insufficient resources to pay taxes, for which the executor may be liable.

Making distributions too early. Paying the beneficiaries before paying the taxes and settling with creditors may leave insufficient resources should unexpected claims arise.

Mishandling real estate. Real estate must be secured, insured and properly maintained. If the property is to be sold, obtain an appraisal and estimates for any needed repairs or improvements as quickly as possible so the property can be brought to market promptly.

Underestimating the time commitment and fiduciary responsibilities. Filing life insurance claims, opening bank accounts, picking up and sorting through the mail, overseeing the preparation and filing of income and estate tax returns and contacting beneficiaries all takes time.

Expecting the (probate) process to be quick. In Illinois, for example, a probate estate typically takes a minimum of one to two years to complete its administration. Each jurisdiction has its own set of rules so understanding your jurisdiction’s probate procedures will leave few, if any, surprises.

Not managing beneficiary expectations. Executors must avoid making promises they can’t keep. Understanding the administration process, overall timeframe and keeping open communications with the beneficiaries puts everyone on the same page.

Not asking for help. Seek counsel from knowledgeable professionals (i.e., estate and trust attorneys, tax accountants, real estate brokers) who are experienced in estate administration and tax matters and can provide the executor with proper guidance. The last undertaking an executor wants or needs is lawsuit.
What happens to a celebrity’s image at death?
Aretha Franklin, the Queen of Soul and eighteen-time Grammy-winning singer, died last month at the age of 76. In addition to her real estate holdings in Michigan and her numerous copyrights, her $80 million estate will likely include another valuable asset—her image and likeness.

How is a celebrity’s image treated during lifetime?

Celebrities’ images and likenesses, as assets, stem from their right to publicity—in essence, their right to control the use of his or her identity for commercial purposes during their lives. Currently, twenty-two states recognize the right to publicity by statute and at least thirty-eight states recognize it under common law theories.

How is a celebrity’s image treated at death?

Not all states that recognize the right to publicity treat it as a transferable asset that survives celebrities’ deaths.  Therefore, celebrities’ domiciles at their deaths determine whether their images and likenesses will be includible for estate tax purposes and reported on any state and/or federal estate tax returns.

A famous example of the importance of domicile is Marilyn Monroe’s estate. Monroe died owning real estate in California and New York and could have claimed domicile in either. California treats the right to publicity as transferable at celebrities’ deaths whereas New York does not. Monroe’s estate claimed New York domicile so as to avoid the steep estate and inheritance taxes that were in effect in California at the time. As her image proliferated in the United States and beyond, her estate tried to assert ownership over her image in an attempt to cash in on it, but was ultimately barred from doing so due to its prior claim of New York domicile.

What does this mean for Franklin’s image?

Franklin died a resident of Michigan. Michigan recognizes the right to publicity during celebrities’ lives but is unsettled as to whether such right survives death.

Though Michigan does not have a state estate tax, Franklin’s estate will likely owe a federal estate tax. Therefore, her estate will be in the position of being able to choose whether to treat her image and likeness as an asset for estate tax purposes. As illustrated by Monroe’s estate, there are benefits and detriments to both.

How are images valued for tax purposes?

Assuming Franklin’s estate treats her image and likeness as an asset for estate tax purposes, it will be difficult to value. Recently, celebrities’ images and likenesses have become a hot audit item by the IRS due to their potential to appreciate greatly and inherent uniqueness as assets.

The IRS assigned a value of $434 million to Michael Jackson’s image and likeness despite his estate claiming a value of just over $2,000. Similarly, the IRS assigned a value of over $11.7 million to Whitney Houston’s image and likeness despite her estate claiming a value of $200,000. Jackson’s tax court matter is still ongoing whereas Houston’s estate recently settled with the IRS earlier this year for approximately $2 million.

Assuming Franklin’s executor asserts ownership over her image and likeness, it will need to pay close attention to valuation and would be advised to anticipate audit by the IRS. It should also be aware that whatever value the IRS assigns at audit will likely be higher than the estate’s original position. As with Houston’s estate, it is likely that Franklin’s estate will settle with the IRS for some lesser, but still significant, valuation for her image in the end.
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