Thursday, March 31, 2011

Bequests - What Happens When the Beneficiary Predeceases?

An often asked question regarding the administration of Trust or Estate after a death occurs is:
1) What happens if the beneficiary predeceased the decedent?
In this age of longevity, it is not uncommon for a beneficiary named under the terms of a Trust or a Last Will and Testament to predecease the individual creating the Trust (the “Trustor”) or the individual creating the Last Will and Testament (the “Testator”).  When this occurs, what happens to the bequest?  For example, a Trustor provides that a specific bequest of $50,000.00 be given to her son, Joseph.  However, Joseph predeceases the Trustor.  When the Trustor dies, what happens to the bequest?  Does it lapse and become null and void?  Or is it still legal effective?  The answer is it depends on the terms of the Trust or Will and the facts of the situation.  Nevada has an anti-lapse statute which provides that a bequest is saved and does not lapse if the predeceased named beneficiary is a child or other relation of the Trustor-Testator and the beneficiary left lineal descendants who survived the Trustor-Testator, unless the Trust or Will provides otherwise.  NRS 133.200 provides as follows:
When any estate is devised to any child or other relation of the testator, and the devisee dies before the testator, leaving lineal descendants, those descendants, in the absence of a provision in the will to the contrary, take the estate so given by the will in the same manner as the devisee would have done if the devisee had survived the testator.”
In our example above, the predeceased beneficiary, Joseph is a child of the Trustor-Testator.  If Joseph left lineal descendants (child, grandchild, et cetera) and the Trust or Will does not provide otherwise, the $50,000.00 bequest will not lapse but will pass to Joseph’s lineal descendants.  This may or may not be what the Trustor desires.  When one creates a Trust or Will, one should always discuss and consider the possibility of a beneficiary predeceasing.  If one does not want the bequest to pass to Joseph’s lineal descendants, the Trust or Will should specifically state that in the event Joseph predeceases, the bequest shall lapse or shall pass to some other beneficiary. 
At the Jeffrey Burr law office, we have many years of experience in assisting clients in their estate plans through the drafting and execution of their Trusts/Wills.  As part of this service, we go to great lengths to determine exactly what the client desires, including the client’s wishes in the event a named beneficiary predeceases the client.     
 - Attorney John Mugan

Tuesday, March 29, 2011

Using 30 Year's Experience to Predict the Future of the Estate Tax Exemption

During the two years before expiration of the “Bush Tax Cuts” (which, from enactment, were set to end on December 31, 2010) tax attorneys expected something to come out of Washington which would provide clarity going into 2010, the year in which the estate tax was fully phased out, and for 2011, the year in which the estate tax was set to come roaring back with the full 55% top rate and an estate tax exemption reduced to $1 million, from the $3.5 million exemption available to estates of decedents dying in 2009.

By the end of 2010, most estate planning professionals guessed that a deal was not going to happen and that the 55% rate and $1 million exemption would come back in 2011, but like the U. S. Cavalry in a John Wayne movie coming to the aid of the settlers, Congress acted just in time, December 17, 2010, to increase the estate exemption to a full $5 million per person with a top estate tax rate of “just” 35%. This law is set to expire on December 31, 2012, and if not extended, will put us back to the 55% rate and $1 million exemption, so we could go through this exercise again in less than two years. The fact that we could end up with a reduced exemption in 2013 has prompted some advisors to suggest caution about using the $5 million exemption for gifts and general planning considerations.

The writer of this blog has been involved with the estate tax for 30 years now and during that time, despite all the rhetoric and hand-wringing, the estate tax exemption has never been reduced, other than through the 2011 repeal of the repeal of the estate tax. Before November 1981’s Economic Recovery Tax Act (“ERTA,” we affectionately called it; funny how those acronyms usually work out) the maximum exemption was only $60,000 as I recall, and with ERTA, it immediately jumped to $200,000 and then grew each year to be $600,000 per person. Then in the late 90’s the exemption was increased from $600,000 to $675,000 and then to a full $1 million at the turn of the millennium. (I have been waiting for the right time to use that phrase, “Turn of the millennium.”) Then with the Bush Tax Cuts, the exemption grew steadily from $1 million, to $1.5 million, to $2 million and finally to $3.5 million in 2009, which brought us to full repeal for those heirs lucky enough to inherit from decedents dying in 2010. So ignoring the repeal year of 2010, the exemption amount has now grown from $3.5 million to $5 million per person. What’s more, “portability” now exists between spouses, meaning that a surviving spouse basically “inherits” the right to use the unused exemption of their last deceased spouse.

With a history of 30 years and no reduction in the estate tax exemption over that time, what are the chances Congress will cut back the existing exemption from $5 million to something less? This blogger sees that as doubtful. Some might argue that Congress will try to raise revenue on the backs of the “rich” and will reduce the $5 million exemption. While this is possible, such a move would be more cosmetic than anything else because, even when the rates were higher and the exemptions lower, the estate tax has normally provided only about 2% of federal revenues. Therefore, barring a demagogic move at raising the estate tax, it is likely the exemption will remain at $5 million, at least. It is, therefore, this blogger’s opinion that clients should make their plans based upon the expectation that the $5 million exemption is here to stay.

Friday, March 18, 2011

April 2011 AFRs Announced

It's going to be a mixed bag this coming month. While short- and mid-term rates are both rising slightly, the long-term Applicable Federal Rate (AFR) will be a touch lower in April than it has been in March. For the month of April 2011 the AFRs will be as follows:

In April the 7520 rate will remain unchanged at 3.0%. To go directly to the IRS' publication, please visit the following website:

Friday, March 11, 2011

Social Security and Remarriage

It is common in our law practice to visit with individuals contemplating a second marriage. Often one of the parties will have a higher Social Security earnings record from a spouse from an earlier marriage. The questions is, if you remarry, how will your earnings record and Social Security benefits be determined?

Generally, if you remarry prior to age 60, you are not eligible for benefits based upon your former spouse’s earning record. However, if you divorce after 10 years of marriage, and your second marriage ends before you turn 60, your benefits based upon your first spouse’s earnings record will be restored. Further, when you reach age 62, you can choose to collect a “spousal benefit” based upon your new spouse’s earnings record or receive a benefit based upon your own earnings, whichever is the larger amount.

Remarry after age 60, and you will be eligible to receive a spousal benefit based on the earnings record of a deceased spouse, the spousal benefit of your current spouse, or a benefit based upon your own work record, whichever is highest.

What happens if your new spouse dies? You will be eligible for a spousal benefit if you are at least 60 years of age (or age 50 if disabled) as long as the marriage lasted at least 9 months, or your spouse had an accidental death, or you had a child (including adoption) together. You must be unmarried at the time of your application.

Social Security has an excellent website that is well organized. Answers to most of your Social Security questions can usually be found within just a few minutes. For more information, go to

  - Attorney James M. O'Reilly

Tuesday, March 8, 2011

Obama's Budget Would Weaken the 365-Year Nevada Dynasty Trust

He’s made a move—President Obama’s recently submitted 2012 budget proposal would limit the existence of Dynasty Trusts to 90 years. Obviously, trusts could still go on longer; however, under this new proposal federal transfer tax exemptions would be lost after 90 years.

A Dynasty Trust, often called a Legacy Trust or a Generation Skipping Transfer (“GST”) Trust, is a special type of irrevocable trust settled for the benefit of one’s descendants. Because of certain federal tax exemptions and estate planning techniques now available, these trusts can be established so that assets placed within them will never be subject to federal estate, gift, and GST tax again. In Nevada, such trusts can exist for up to 365 years.

If someone would like to set up a Legacy Trust, it’s time to move quickly. President Obama’s proposal would affect new transfers to Dynasty Trusts, but not trust fundings that have occurred prior to enactment. That is to say, if someone sets up and funds a Nevada GST Trust before the law is passed, such trust would be “grandfathered in” and therefore be exempt from the payment of transfer taxes for the next 365 years.

Remember, with estate planning the key words are “sooner versus later” and “old and cold”. The time to act is now! For a more in depth review of Obama's proposal, see the Wall Street Journal article by Laura Saunders,