Thrifty Thinking: Inheritance

I haven't really posted about this before, but it's something that's important to think about early, before you find yourself arguing after someone's death - the inheritance. I don't know much about it, but John O. McManus provides his legal expertise in the tips below.

1) Is it appropriate to use a personal property memo to capture personal items? Can enforcement of such a memo be guaranteed? 

A personal property memo is a written statement referenced in a last will and testament that is used to leave tangible personal property not specifically disposed of in the will to beneficiaries. Often this is used to keep certain items out of public knowledge in the probate process. Edits to such a memo can be made without the need to re-sign a will – but this memo is not an official codicil or amendment to the will. A specific bequest of an item of tangible personal property should provide sufficient description to clearly distinguish the item from other similar items that are owned or may be acquired by the decedent. If an asset is of particular importance to you or to one of the beneficiaries of your estate, contemplate provisions in your planning that provide specific language, which may allow for greater enforceability or take advantage of the step up in basis.

2) Should you catalog personal property in a memorandum? Should items be specifically insured?  

The executor of an estate is required to make a good faith search for property listed in the memo for a certain period, usually 30 days. Cataloging items and having appraisals done in advance can greatly reduce stress around administration of the estate. It can also hold those people in control or possession accountable that such items existed.

3) How do you use a life estate for personal property such as art, furniture or jewelry, especially in a second marriage?

A life estate allows the surviving spouse to enjoy an asset for the balance of his or her life. Upon the passing of the surviving spouse, the asset then flows back into the estate of the first spouse and passes to the first spouse’s beneficiaries (often first spouse’s children from a first marriage). This tool is effective, especially with residences, personal effects and contents of a home, which can qualify for a QTIP election.

4) If you are a history buff with a collection of Revolutionary and Civil War rifles, who can you leave them to? 

Ensure that the decedent has all appropriate registrations in order for the executor to take possession in the name of the estate. An old war rifle that has been passed down through the family might not be currently registered. Leaving such an item, even only overnight, with an appraiser can be a felony. In fact, the vehicle used to transport the gun could be seized and a $250,000 fine levied, as well. Inheritance of a gun is one exception to the federal rules prohibiting transportation of a gun out of state. Many states also ban “implements of bodily harm.” The sword above your fireplace, the throwing stars or nunchaku that have been in your family for generations may need special consideration in your planning.

5) Will providing for pets, especially rare or exotic species, be difficult?

To help conserve the environment and protect certain rare or endangered species of animals, certain restrictions have been put in place. The Federal Endangered Species Act, for example, prohibits owning or transporting an ever-expanding list of plants and animals. Even mounted animals such as fish or birds may not legally be transported under the Migratory Bird Treaty Act. Ivory can be especially challenging to plan for with restrictions that may be nearly impossible for an executor to determine.

6) How do you transfer and value intellectual property, copyrights, projected sales, music and art?

Intellectual Property (IP) rights refer to a wide variety of rights the creator/author has to his or her intellectual property.  It is critical to explicitly plan for the array of rights associated with IP so that certain rights are not relegated to the residual estate. Understand that transfer of the medium of storage for IP – the canvas, DVD, book etc. – does not transfer all rights associated with the property. Creators of IP who have signed rights of intellectual property to a publisher, movie company etc. after Jan. 1, 1978 can terminate such rights after 35 years. 2013 will be the first year that IP creators or their heirs could recapture rights given away.

7) Is it illegal to transport certain items across state lines? How can you plan for covering expenses and proper transportation?

Certain items pose unique difficulty to transport to the intended beneficiary. Make sure the will provides for those costs. Think about moving a concert grand piano across the country or gold bars with armored trucks; it is important to consider how such costs could deplete inheritances to loved ones and could cause dissent. Wine collections, for example, will require someone with a liquor license to move any amount greater than five gallons across state lines without incurring a tax. If a beneficiary receiving a gun does not live in the same state as the decedent, it will be necessary to hire a registered dealer to arrange delivery.

8) If you are named a fiduciary, what steps should you consider taking now to ensure you are protected during probate?

Be certain that the will includes language giving the beneficiary or the executor authority to pay debts secured by assets such as mortgages or lines of credit, storage and shipping. If inheriting a house with a mortgage, see whether language (e.g., “subject to any indebtedness secured thereby”) is included in the planning documents. It may not be otherwise clear whether the fiduciary must, or even can, pay the debt. Be certain all assets continue to be or are insured. During the probate process, anything from floods to fires could destroy a home and its contents.

9) Particularly if you have bank accounts worldwide, what considerations to simplify the probate process should be taken?

Administration of an estate requires collection of date of death values for all assets worldwide. Retrieving values in writing from banks can take significant time. Relatively small foreign accounts and assets can cause disproportionally large challenges to administer after the death of a loved one. Rules for collection of foreign assets vary greatly by country, so it might be best to close smaller accounts. It may make sense to set up ownership of foreign assets by entities understood and respected only by the country holding the asset. Be certain to file the FBAR with the IRS each year, which is required for assets over $10,000. The FBAR is also a good method for taking inventory of out-of-country assets.

10) What strategies can you use to ensure an equitable distribution of personal property when considering certain highly-valued assets?

Often there are one or two items of tangible personal property with much greater value than others. Such items can make equitable distribution more challenging. There are a few best practices for this situation: 

•  Specific bequest – whether a special piece of jewelry, a prize-winning horse or an original piece of art, certain items may hold more value to a specific heir. You might consider leaving such an item outright. In particular, have the discussion while you are alive. 
• To be divided by executor/trustee in his or her sole and absolute discretion. 
• To be divided as beneficiaries agree [in as equal shares as practicable]. The executor/trustee will sell or distribute all property over which there is disagreement. 
• Beneficiaries to select by lot in equal shares, with inequities to be made up by payment of cash. 
• Silent auction held by executor.

“When a family member passes away, you don’t want to waste time and energy squabbling over things; you want to support one another and celebrate your loved one’s life,” commented McManus. “Planning ahead with a professional helps ensure that potential challenges with personal property, such as family heirlooms, are anticipated and prepared for – life’s too short to damage relationships, needlessly fighting with the people who are supposed to be on the same team.”

To learn more about the benefits of tax and estate planning, visit www.mcmanuslegal.com.