What is an Advancement?

In the estate planning and administration context, an advancement is a gift made to an heir prior to death that is treated as an advance on the heir's ultimate share of the estate. For example, if dad made a $50 advancement to son during his lifetime, died intestate with $100 to his name, and had three children and no spouse, the two children that had not received lifetime gifts would split the $100 equally. The $50 is treated as an advance on the son's ultimate inheritance; otherwise, the remaining $100 would be split three ways, with the son receiving in total a disproportionate share.

Under the Uniform Probate Code, a gift made prior to death is only treated as an advancement if accompanied by contemporaneous written documentation that the gift is to be treated as such. While the concept of an advancement can only technically apply where a decedent dies intestate and left documentation of intent to treat a gift as an advancement, my will and trust form language includes a provision confirming that any prior gifts are not advancements. It is important for clients to consider the impact that providing additional support and resources to one heir during life can have on all heirs upon death.

The comments to the Uniform Probate Code provide a good example of how advancements work, which I simplify here: G died intestate, survived by his three children, A, B, and C. G’s probate estate is valued at $60, but during his lifetime, G had advanced A $50 and B $10 and memorialized in writing that such gifts be advancements. Upon G's death, the first step in calculating the children's respective shares in G's estate is to add back the advancements, resulting in a theoretical "hotchpot" estate of $120 (60 + 50 + 10), of which the three children would be entitled to equal shares.

Because A has received an advancement greater than the share to which he is entitled, A can retain the $50 advancement but is not entitled to any additional amount. This leaves $70 (60 + 10) remaining in the hotchpot estate, of which B and C are each entitled to half. B receives $25 (having already received $10) and C receives the remaining $35. Had A and B's gifts not been treated as advancements, A would have received $70, B would have received $30, and C would have received $20 from G's estate (aggregating pre-death gifts with an equal share of the remaining estate). This example illustrates why it is important to consult with an estate planning attorney prior to making substantial, disproportionate gifts to heirs.

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Updating Estate Plans for the SECURE Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted on December 20, 2019. The Act made a number of changes to how retirement plans function, such as increasing the age at which retirement plan participants need to take required minimum distributions (RMDs) to 72, making it easier for small business owners to set up and maintain retirement plans, and allowing many part-time workers to participate in a retirement plan. However, the SECURE Act made an important change that impacts the see-through trust rules, which will require many individuals to update their revocable living trust agreements and estate plans.

Prior to the SECURE Act, non-spouse beneficiaries who inherited a retirement plan or IRA (i.e., descendants of the IRA owner) could qualify to "stretch" their inherited IRA and take RMDs calculated based on the descendant's life expectancy. This was generally a good thing because it resulted in the maximum deferral of income taxes, and trusts were drafted to help ensure that this stretch opportunity was realized where a trust was named as the beneficiary of an IRA. I discussed how trusts can qualify as beneficiaries of an IRA in a prior post.

The SECURE Act largely eliminated the law that allowed non-spouse IRA beneficiaries to stretch IRA distributions over their life expectancy. Now, most non-spouse beneficiaries must receive (and take into income) the entire IRA account balance within ten years of the death of the account owner, regardless of whether the beneficiary or a trust for the beneficiary's benefit was the named IRA beneficiary. There are good reasons why an account owner would want to name a trust as the beneficiary of their IRA, such as protecting an imprudent beneficiary from squandering an inheritance, including inherited IRA funds. This need still exists, but because of the SECURE Act, many trust provisions describing the trustee's obligations with respect to IRAs need to be changed.

Specifically, many trust agreements drafted before the SECURE Act provided that trust beneficiaries would receive their inheritances in a continuing trust known as as a "conduit trust" for IRA purposes. A conduit trust requires the immediate distribution of all funds withdrawn from the IRA to the individual trust beneficiary. The ten-year rule under the SECURE Act would, therefore, result in trust beneficiaries receiving all of the inherited IRA funds ten years after the account owner's death. A large, mandatory trust distribution at a fixed time during a trust beneficiary's life is inconsistent with what most trustmakers intend in naming trusts as IRA beneficiaries in the first place. Even worse, however, is that trusts that are not amended to function appropriately under the SECURE Act and which are designated as IRA beneficiaries could even result in the ten-year stretch being reduced to five years.

Most post-SECURE Act trust agreements will have beneficiary's continuing trusts qualify as "accumulation trusts," as opposed to conduit trusts, for IRAs paid to such trust, which would not require the immediate distribution of IRA funds. Post-SECURE Act trust agreements will also be drafted consistent with the SECURE ACT's exception to the ten-year IRA payout rule for individual beneficiaries less than ten years younger than the account owner and disabled and chronically ill individuals, who can continue to take distributions over their their life expectancy. Disabled beneficiaries in particular may benefit from inheriting an IRA through a continuing trust, but it is critical that such a trust be calibrated to the SECURE Act to ensure the lifetime stretch opportunity is preserved. In sum, now is the time to update your estate plan so that it functions properly under the SECURE Act.

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Higher FDIC Protection for Trust Accounts

As most people know, the Federal Deposit Insurance Corporation (FDIC) is a federal government agency that insures customers of insured banks so that even if the bank fails, the depositors do not lose their money. The basic FDIC insurance amount is $250,000 per depositor per insured bank per account category.

The account categories include single-owner accounts, joint accounts, revocable trust accounts, and entity accounts. In other words, a single depositor can multiply their FDIC coverage by spreading their deposits across a single-owner account, joint account, etc. Of course, coverage can be multiplied by spreading deposits across multiple banks as well.

One benefit of establishing a revocable trust and opening a bank account in the name of the trust is that the maximum FDIC coverage for a revocable trust account at a single bank is $250,000 multiplied by the number of unique beneficiaries of the trust. To qualify for this increased coverage, the account name must indicate trust ownership, the trust beneficiaries must be identified in the trust agreement, and the beneficiaries must be living persons or qualified charitable organizations.

Of course, such a trust account will also have the benefit of never needing probate to administer, and the successor trustee will easily be able to manage the account upon the death or incapacity of the grantor of the trust. Increased FDIC insurance coverage is one more benefit of establishing a revocable trust.

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Introduction to Trust Administration

When the settlor or settlors of a revocable trust die, the trust becomes irrevocable and the successor trustee is tasked with carrying out the settlor's final wishes as expressed in the trust agreement. One of the first tasks required of the trustee of such a trust by the Utah Code is to notify the trust beneficiaries that the trust exists, of the identity of the settlor(s), and that the beneficiaries have the right to request a copy of the trust agreement and the right to a trustee's report. This notice can be in the form of a letter that includes a copy of the trust agreement, the trustee's name and address, and a further notice that the beneficiaries have 90 days to commence a judicial proceeding to contest the validity of the trust until losing that right.

The trustee will need to marshal all trust assets, which will often require filing an affidavit of trusteeship with the county in which any trust real property is located, obtaining an EIN for the trust, making a claim for life insurance owed to the trust, and opening or taking control of any trust bank accounts or brokerage accounts. The trustee should also prepare an inventory of trust assets and maintain an accounting of all trust transactions. There are a number of potentially critical tax-related matters that may need to be attended to, particularly for large trusts, which are beyond the scope of this post. Another consideration is publishing notice to creditors of the trust (which can also be valid notice as to creditors of the decedent).

After all trust assets have been marshaled and debts and expenses paid, the trustee should send a letter to the trust beneficiaries with a "proposal for distribution" of the majority of the trust assets. This proposal should notify the beneficiaries of their right to object to the proposed distribution within 30 days; after this period, the right to object would terminate. This letter or a subsequent letter should enclose a "receipt and release" for each beneficiary and should explain that the trustee must receive all of the beneficiaries' receipts and releases before any distributions can be made. The trustee should withhold a small portion of trust funds for final expenses, such as a final tax return. Once all of the beneficiaries have signed and returned their receipt and release, the trustee can make the proposed distributions. Except for paying final expenses, closing accounts, and distributing any remaining amounts, the trustee's job in most cases will then be complete.

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Creating Individual Inherited Retirement Accounts from a Trust Account

As I discussed in a previous post, a trust may be named as the beneficiary of a retirement plan upon the plan owner's death. There are complications and disadvantages of doing so, but there are potentially important reasons to name a trust as a retirement plan beneficiary. For example, naming a supplemental needs trust created for an individual with special needs as a retirement plan beneficiary, instead of the individual, will prevent the individual from ceasing to qualify for means-tested public assistance due to inheriting the retirement account.

Upon the termination of the trust that is the named beneficiary of a retirement account, any amounts remaining can be passed to the remainder beneficiaries of the trust intact, meaning in a manner that is not treated or reported as a taxable distribution from the retirement account. Instead, the transfer is treated as a plan-to-plan transfer to individual accounts established for the remainder beneficiaries of the trust.

In my experience, the custodian of the retirement account often requests a reference to legal authority that would allow the transfer of the retirement account from a trust account to separate account(s) in the individual name of the trust beneficiaries. IRS private letter ruling 200750019 is one such authority wherein the IRS permitted a trust that was a retirement plan beneficiary to be bypassed and separate, inherited IRA accounts established for the trust beneficiaries. While not binding, this ruling indicates that the IRS regularly permits this practice and can help assure a custodian that this practice is permissible.

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Estate Planning Fundamentals

Every estate plan should include a last will, power of attorney, and health care directive; additional benefits can be realized by including a revocable living trust. Each document serves a particular and important purpose that cannot be served by any of the other documents; these purposes are described below.

A last will and testament specifies who will receive and who will manage and distribute your assets upon your death. It also names a guardian for your minor children. If you pass away without a will, you are said to have died “intestate,” and the laws of the state will determine who receives your assets. In addition, since all minor children under 18 years of age must have a guardian, a guardian will be selected for your children through a judicial process if you pass away without a valid will.

A will does not allow your estate to avoid the probate process; it simply gives directions to the probate court, and a will must be probated in order to be effective. Probate is the legal process for establishing the validity of your will and transferring your “probate property” in accordance with your will. However, incorporating a revocable living trust into your estate plan can allow you estate to avoid the probate process and achieve additional planning objectives.

A revocable living trust is essentially a contract whereby you, as “grantor,” transfer your assets to a “trustee” with specific instructions contained in the trust agreement describing how the trust assets are to be managed. You will typically serve as the initial trustee of your revocable living trust as well as the grantor, meaning that you retain complete control over all of your assets while you are living. A trust can be an especially useful tool for reducing estate taxes that would otherwise be owed or establishing protective trusts for the benefit of your descendants upon your death.

When the grantor of a trust passes away, the successor trustee distributes the trust assets according to the instructions in the trust agreement. This is the mechanism for avoiding probate; the successor trustee legally takes over the management and distribution of your estate. Any property transferred to your revocable trust will avoid probate. Note that some assets pass by operation of law without the need for a trust or probate; these include property held in joint tenancy with rights of survivorship, retirement plans and life insurance policies that have a beneficiary designation, payable-on-death bank accounts, etc.

If you have a revocable living trust, you still require a last will and testament just in case an asset remains in your estate upon death. If your plan includes a trust, your will is often referred to as a “pour-over” will since it simply directs that all of your assets be “poured-over” into your trust to be disposed in accordance with its terms.

A durable power of attorney authorizes whoever is named in that document to act on your behalf to the extent authorized in the document. This document is effective if you are physically or mentally incapacitated, but ends upon your death; this allows another individual to manage your affairs during any time that you are unable. A power of attorney may be drafted so that it is effective from the moment it is signed, or may become effective only if you become incapacitated. After death, the successor trustee of your revocable living trust (or the personal representative named in your will if you do not have a living trust) will possess the powers of management and the right to distribute your assets to your beneficiaries.

An advance health care directive specifies your preference for health care treatment, such as whether life support systems should be continued if there is no hope of recovery. It also appoints someone else to make these decisions for you if ill health prevents you from being able to specify your own wishes. An estate plan may include any number of addition documents, but these are the basics.

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Estate Planning with Gun Trusts

Gun trusts are in the news this week due to President Obama's executive actions addressing gun violence and new regulations published by the ATF. Despite the fact that purchasing a firearm through a gun trust will be more onerous under the new regulations, the gun trust will remain an important planning tool for persons that own certain firearms.

By way of background, the key federal laws regulating firearms are the National Firearms Act of 1934 (NFA) and the Gun Control Act of 1968 (GCA). Title II of the GCA incorporates provisions of the NFA and regulates certain "dangerous weapons," such as machine guns, that are often referred to as "Title II firearms" or "NFA firearms." NFA firearms are subject to strict registration, transfer, and tax requirements. See Lee-ford Tritt, Dispatches from the Trenches of America's Great Gun Trust Wars, 108 Nw. U. L. Rev. 743 (2014).

Prior to the new regulations, individual applicants could not legally acquire an NFA firearm without completing a transfer form, having it signed by the chief law enforcement officer (CLEO) of the locality where the applicant is located, and providing their photograph and fingerprints with the transfer form. An individual could avoid these requirements by acquiring the firearm through a gun trust (or other entity) as long as the trust had legal existence and the trustee signed the transfer form.

The new ATF regulations eliminate the requirement that the transfer forms be signed by a CLEO but requires all "responsible persons" with respect to a gun trust to submit photographs and fingerprints. In other words, it is now easier for an individual to acquire a NFA firearm but more onerous for a gun trust or other entity.

Nevertheless, a key advantage of titling NFA firearms in a gun trust remains, which is that "more than one person may legally possess" the gun. Otherwise, a household member of an individual NFA firearm owner who knows about the gun and has the ability to access it could be in constructive possession and thereby be committing a federal crime. The laws governing NFA firearms provide for severe criminal penalties that could arise unexpectedly; talk with an attorney familiar with gun laws and gun trusts whenever an NFA firearm is acquired.

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Vehicles and Revocable Trusts

In order to avoid probate upon death, it is necessary to transfer certain assets from your personal name into a revocable trust. I discussed non-probate assets in an earlier post; most other assets, particularly real estate, should be transferred into a revocable trust.

Whether personal vehicles should be transferred into a revocable trust is sometimes debated, but generally is not worth the expense and hassle. First, vehicles are purchased and sold on a relatively frequent basis, making the transfer of a vehicle that is later sold by the transferor unnecessary. Second, in the event of an accident, a vehicle title that lists a trust as an owner instead of an individual can give a potential litigant the impression that the owner of the vehicle is wealthy and may in fact encourage a lawsuit.

Third, even if a person passes away without having transferred a vehicle into a trust, the vehicle can still likely be transferred outside of the probate process. This is because most states, particularly those that have adopted the Uniform Probate Code, have a statutory provision for a "small estate affidavit." This enables some assets such as vehicles to be transferred from the estate of the decedent outside of probate. The applicable provision states:

"Thirty days after the death of a decedent, any person... having possession of tangible personal property... belonging to the decedent shall... deliver the tangible personal property... to a person claiming to be the successor of the decedent upon being presented an affidavit...."

The contents of the affidavit vary slightly among states but generally require that the value of the estate (excluding assets in a trust or that pass by operation of law) be below a certain threshold and that no probate has been opened. Some state agencies, such as the Utah Department of Motor Vehicles, even have a form that complies with the statutory requirements and can be completed without much more difficulty than signing over a car title. Before transferring a vehicle into a revocable trust, check your state's statutes and see if your vehicles can be transferred in this manner.

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Probate Assets vs. Non-Probate Assets

Some people are under the mistaken impression that having a will means that the probate process will be avoided upon death. Having a will allows you to appoint who will handle your affairs and who will inherit assets, and it can provide for various methods to lower costs to the estate (such as waiving the bond required of a personal representative). However, a will does not avoid the probate process; it simply gives directions to the probate court, and it must be probated in order to be effective.

If an asset is held in joint tenancy and a joint tenant survives, that asset will be a non-probate asset and pass outside of the probate process. Life insurance, annuities, IRAs, pension plans, or accounts with a P.O.D. (payable on death) or T.O.D. (transfer on death) designation will avoid probate using beneficiary designations, if the beneficiary survives. Any property held in trust, such as a living trust, will be non-probate property. Nearly all other assets cannot be transferred upon death without passing through the probate process.

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