Introduction. A will is a written declaration providing for the transfer of property at death. Although having legal significance during life, the will is without legal force until it “speaks” at death. Upon the death of the decedent, rights of named beneficiaries vest, and some obligations of named fiduciaries arise. However, the will cannot operate to dispose of estate assets until it has been formally admitted to probate. Historically a “will” referred to the disposition of real property, while a “testament” to referred to a disposition of personal property. Today, that distinction has vanished.
The will operates on the estate of the decedent, determining the disposition of all probate assets. However, its sphere of influence does not end there: Under NY Estates, Powers and Trusts law (EPTL), the will can dictate how estate tax is imposed on persons receiving both probate and nonprobate assets. Probate assets are those assets capable of being disposed of by will. Not all assets are capable of being disposed of by will. For example, a devise of the Adirondack Northway to one’s heirs — although a nice gesture — would be ineffective. Similarly, one cannot dispose by will of assets held in joint tenancy, such as a jointly held bank account or real property held in joint tenancy, since those assets pass by operation of law, regardless of what a contrary (or even identical) will provision might direct.
So too, a life insurance policy which designates beneficiaries other than the estate on the face of the policy would trump a conflicting will designation. However, litigation could ensue, especially if the conflicting will provision appeared in a will executed after the beneficiary designation was made in the insurance policy. The reason for the insurance policy prevailing over the will designation is not altogether different from the situation involving the Northway: The insurance company will have been under a contractual obligation to pay the beneficiaries. That obligation arguably cannot be affected by a conflicting will provision since this would cause the insurance company to breach its obligations to the named beneficiaries under the life insurance contract, just as the transfer by Albany to the decedent’s beneficiaries of title to the Northway would breach the obligation of New York to retain title over the public thoroughfare.
Note that the decedent could properly dispose of the insurance policy by will if the life insurance policy instead named the estate of the decedent as the sole beneficiary. In fact, in that case, only the will could dispose of the insurance contract. If there were no will, the contract proceeds would pass by intestacy to the decedent’s heirs at law. If the testator has a good idea to whom he wishes the proceeds of the policy to pass following his death, it is generally a poor idea to own the policy outright, regardless of whether the proceeds of the policy are paid to the estate of the decedent or to beneficiaries named in the policy. This is so because if the decedent owns the policy, the asset will be included in his gross estate, and therefore will be subject to federal and New York estate tax. This result also illustrates the concept that the gross estate for federal and NYS estate tax purposes includes both probate and nonprobate property.
By virtue of transferring the policy into an irrevocable life insurance trust, the testator could avoid this potential estate tax problem. If the testator is planning to purchase a new policy, the trustee of a new or existing trust should purchase the policy. If the testator wishes to transfer an existing policy to a trust, the Internal Revenue Code (which New York Tax Law follows) provides that he must live for three years following the transfer for the policy to be excluded from his gross estate. If the decedent is not sure to whom he wishes to leave the insurance policy, creating an irrevocable life insurance trust to own the policy may not be a good idea, since the beneficiary designation will be irrevocable. However, if the testator knows to whom he wishes the policy benefits to pass, an irrevocable trust may reduce estate tax. The insurance policy will also have greater asset protection value if placed in trust. Finally, the proceeds of the life insurance policy held in trust could be used by beneficiaries to pay estate taxes. This can be helpful if the estate is illiquid.
II. Formalities of Execution
A will may be executed by any person over the age of majority and of sound mind. The Statute of Frauds (1677) first addressed the formalities of will execution. Until then, the writing of another person, even in simple notes, constituted a valid will if published (orally acknowledged) by the testator. The statute required all devises (bequests of real property) to be in writing, to be signed by the testator or by some person for him in his presence and by his direction, and to be subscribed to by at least three credible witnesses. The rules governing the execution of wills in New York and most other states (except Louisiana, which has adopted the civil law) have remained fairly uniform over the centuries. The common law rules of England have since been codified in the States. In New York, these statutory rules are found in the EPTL (“Estates, Powers and Trust Law”).
For a will to be valid, the EPTL provides that the testator must (i) “publish” the will by declaring it to be so and at the same time be aware of the significance of the event; (ii) demonstrate that he is of sound mind, knows the nature of his estate and the natural objects of his bounty; (iii) dispose of his property to named beneficiaries freely and willingly; and (iv) sign and date the will at the end in the presence of two disinterested witnesses. While the execution of a will need not be presided over by an attorney, the EPTL provides that where an attorney does preside over execution, there is a presumption that will formalities have been observed. The execution of a “self proving” affidavit by the attesting witnesses dispenses with the need of contacting those witnesses when the will is later sought to be admitted to probate.
A will should be witnessed by two disinterested persons. A will witnessed by two persons, one of whom is interested, will be admissible into probate. However, the interested witness will receive the lesser of the amount provided in the will or the intestate amount. A corollary of this rule is that anyone who receives less under the will than under intestacy would suffer a detriment by being the only other witness. In general, it is not a good idea for an interested person to witness a will, although there are of course times when this admonition cannot be heeded. The rule is less harsh if the execution of the will is witnessed by two disinterested witnesses in addition to the interested witness. In this case, the interested witness is permitted to take whatever is bequeathed to him under the will, even if this amount is more than he would have received by intestacy.
III. Rights of Heirs
Following the testator’s death, the original will may be “propounded” to the Surrogate’s Court for probate. For a propounded will to be admitted, the Surrogate must determine whether the will was executed in accordance with the formalities prescribed in the EPTL. If the decedent dies intestate (without a will) the estate will still need to be administered in order to dispose of the estate to “distributees.” The term distributee is a term of art which defines those persons who take under the laws of descent in New York. A beneficiary under the will may or may not be a distributee, and vice versa. All distributees, whether or not provided for in the will, have the right to appear before the Surrogate and challenge the admission of the will into probate. Thus, even distant heirs may have a voice in whether the will should be admitted to probate. Distributees may waive their right to appear before the Surrogate by executing a waiver of citation. A distributee waiving citation is in effect consenting to probate of the will. Distributees, either when asked to sign the waiver, or when being served with a Citation, will be provided with a true copy of the will.
If a distributee does not execute a waiver, he must be served with a citation to appear before the Surrogate where he may challenge the admission of the will into probate. Since a distributee having a close relation to the decedent would be the natural objects of the decedent’s bounty, the disinheritance of a closely related distributee would have a higher probability of being challenged than would the disinheritance of a distant heir.
Persons taking under the will who are not distributees are also required to be made aware that admission of the will into probate is being sought. Those persons would receive a Notice of Probate, but would have no statutory right to receive a citation. A Notice of Probate is not required to be sent to a distributee. Any person in physical possession of the will may propound it for probate. Not propounding the will with respect to which one is in physical possession works to defeat the decedent’s testamentary intent. Accordingly, legal proceedings could be brought by distributees (those who would take under the laws of intestacy) or other interested persons to force one in possession of the will to produce a copy of the will and to propound the will for probate. It appears that an attorney in possession of the original will is under an ethical, if not a legal, duty to propound the will into probate. The NYS Bar Ethics Committee observed that an attorney who retains an original will and learns of the client’s death has an ethical obligation to carry out his client’s wishes, and quite possibly a legal obligation…to notify the executor or the beneficiaries under the will or any other person that may propound the will…that the lawyer has it in his possession. N.Y. State 521 (1980).
IV. Importance of Domicile
A will of a decedent living in New York may only be probated in the county in which the decedent was “domiciled” at the date of death. The traditional test of domicile is well established. “Domicile is the place where one has a permanent establishment and true home.” J. Story, Commentaries on the Conflict of Laws § 41 (8th ed. 1883). Therefore, the will of a decedent who was a patient at NYU Medical Center for a few weeks before death but was living in Queens before his last illness would be probated in Queens County Surrogate’s Court. The issue of domicile has other important ramifications. For example, while New York imposes an estate tax, Florida does not. In addition, “ancillary” probate may be required to dispose of real property held by a New York domiciliary in another state. For this reason, it is sometimes preferable to create a revocable inter vivos trust to hold real property that would otherwise require probate in another jurisdiction. Converting real property to personal property by deeding it into a limited liability company might also provide a solution, since personal property (in contrast to real property) may be disposed of by will in the jurisdiction in which the will is probated.
V. Admission to Probate
If no objections are filed, and unless the instrument is legally defective, the original instrument will be “admitted” to probate. In practice, clerks in the probate department make important decisions affecting the admission of the will into probate. For this reason, among a legion of others, probating of wills of decedents by persons other than attorneys is ill-advised. Following the admission of the will into probate, the Surrogate will issue ““Letters Testamentary” to the named Executor to marshal and dispose of assets passing under the will. If the will contains a testamentary trust, “Letters of Trusteeship” will be issued to named Trustees under the will. Letters Testamentary and Letters of Trusteeship are letters bearing the seal of the Surrogate which grant the fiduciary the power to engage in transactions involving estate assets.
VI. Executors and Trustees
The Executor and Trustee are fiduciaries named in the will whose duty it is to faithfully administer the will or testamentary trust. The fiduciary is held to a high degree of trust and confidence. In fact, a fiduciary may be surcharged by the Surrogate if the fiduciary fails to properly fulfill his duties. In most cases, there will be only one Executor, but occasionally a co-Executor may be named. The will may also contain a designation of a successor Executor and the procedure by which a successor Executor may be chosen if none is named. A mechanism by which an acting Executor may be replaced if unable to continue serving, or may depart, if he so wishes, would also likely be addressed in the appropriate will clause. Even in cases of intestacy, a bank, for example, will require proof of authority to engage in transactions involving the decedent’s accounts. The Surrogate will issue “Letters of Administration” to the Administrator of the estate of a decedent who dies intestate. An Administrator is a fiduciary of the estate, as is the Executor or Trustee.
A trustee designation will be made for trusts created in the will. In some cases, the Executor may also be named a Trustee of a testamentary trust, but the roles these fiduciaries play are quite different, and there may be compelling reasons for not naming the Executor as Trustee. For example, the Executor may be older, and the beneficiaries may be quite young. Here, it may be desirable to name a younger Trustee. The decedent might even wish that the Trustee be the parent. Multiple trustees may also be named. A corporate or professional Trustee may be named to assist in managing Trust assets. One should be aware that trusts and trustees often form symbiotic relationships, and the costs of naming a corporate or professional Trustee should be carefully evaluated. Like the executor, a trustee is also a fiduciary. One important rule to remember when naming a trustee is that under the EPTL, a trustee may not participate in discretionary decisions regarding distributions to himself. Thus, if a sole trustee were also the beneficiary of a testamentary trust, another trustee would have to be appointed to decide the extent of discretionary distributions to be made to him.
The rule is actually a constructive one, in that it prevents deleterious estate tax consequences. The rule is also helpful from an asset protection standpoint, since a beneficiary who is also trustee could be required to make distributions to satisfy the claims of creditors. If the trust is a discretionary trust in which the beneficiary has no power to compel distributions, the trustee could withhold discretionary distributions under the creditor threat disappeared.
VII. Avoidance of Intestacy
Unless all or most assets of the decedent have been designed to pass by operation of law, intestacy is generally to be avoided, for several reasons: First, the decedent’s wishes as to who will receive his estate is unlikely to coincide with the disposition provided for in the laws of descent. Second, the will often dispenses with the necessity of the Executor providing bond. The bond required by the Surrogate may constitute an economic hardship to the estate if the estate is illiquid. If there is no will, there will be no mechanism by which the decedent may dispense with the requirement of furnishing bond. Third, a surviving spouse has a right to inherit one-third of the decedent’s estate. If the will leaves her less, she may “elect” against it and take one-third of the “net estate.”” However, if the decedent dies intestate, the surviving spouse has greater rights: Under the laws of descent in New York, a spouse has a right to one-half of the estate, plus $50,000, assuming children survive. If there are no children, the surviving spouse is entitled to the entire estate.
In the event no administrator emerges from among the decedent’s heirs at law, a public administrator will have to be appointed. Disputes among heirs at law may arise as to who should serve as Administrator. If there are six heirs at law with equal rights to serve as Administrator, it is possible that the Surrogate would be required to issue Letters of Administration to six different people. What a will may provide is limited only by the imagination of the testator and the skill of the attorney. This is also why it is imperative to have a will in place even where the rules of descent (intestacy) are generally consistent with the decedent’s testamentary scheme.
VIII. Lost, Destroyed & Revoked Wills
When executing a will, the testator is asked to initial each page. Paragraphs naturally ending on one page are sometimes intentionally carried over to another page to thwart tampering by improper insertion of a substitute page. If the original will has been lost, a procedure exists for the admission of a photocopy, but the procedure is difficult and its outcome uncertain. Removing staples from the will to copy or scan it is a poor idea. To a degree not required of most other legal instruments, the bona fides of a will is dependent upon a finding that its physical integrity is unimpeachable, meaning that the will is intact and undamaged. A will that has been damaged (e.g., staples removed for photocopying) may be admissible, though not without considerable difficulty. While the Nassau County Surrogate has accepted wills whose staples have been removed without undue difficulty, some New York Surrogates take a dim view of wills that are not intact. If the original will cannot be located and was last in the possession of the decedent, there is a presumption that the will was revoked. The reasoning here is that in such cases it is likely that the decedent intentionally destroyed the will, thereby revoking it.
Revocation will also occur if the will has been mutilated. In some jurisdictions, if provisions of the will have been crossed out, the will be deemed to have been revoked. In other jurisdictions, crossing out provisions will not invalidate the will, but will result in the instrument being construed without the deleted provisions. A will may be revised in two ways: First, a codicil may be executed. A codicil is a supplement to a will that adds to, restricts, enlarges or changes a previous will. The Execution of a codicil requires adherence to will formalities. The second and more effective means of revising a will is to execute a new one. The first paragraph of a will typically provides that all previous wills are revoked.
IX. Whether to Destroy or Retain The Old Will
Whether to retain an old will is the subject of some disagreement. This disagreement likely arose because there are situations where the will should be destroyed, and situations where it should not be destroyed. Since a new will expressly revokes the previous will, the natural inclination might be to “tear up” an old will after executing a new one. However, this is not always the preferred course of action. The new will may be lost, secreted, successfully challenged, or for whatever reason not admitted to probate. In this circumstance, the existence of the old will may be of great moment. If the new will is not admitted to probate, an old will may be propounded for probate. If there had been a previous will, but it was destroyed, the decedent will have died intestate. In that case, the laws of descent will govern the disposition of the decedent’s estate. The retention of the old will is insurance against the decedent dying intestate. In intestacy, the laws of descent govern the disposition of the estate.
There are situations where the decedent would prefer the laws of descent to govern. In that case, it would make perfect sense for the decedent to destroy the old will. However, in many if not most situations, the decedent would prefer the terms of the old will to the laws of descent. In these cases, the old will should not be destroyed. To illustrate a situation where the old will should not be destroyed: If a will contestant demonstrates that the decedent was unduly influenced when executing the new will, an older will with similar terms could be propounded for probate. If the decedent had disinherited or restricted the inheritance of the will contestant in the previous will as well, the existence of the old will is invaluable, since a disgruntled heir, friend, or lover would be less likely to mount a will contest. Even if a will contest were to occur, and the will contestant were successful, the victory would be pyrrhic, since the contestant would fare no better under the previous will. Knowledge of the existence and terms of the previous will would also reduce the settlement value.
In some situations the old will should be destroyed: If the new will dramatically changes the earlier will, the testator might prefer the rules of intestacy to the provisions in the old will. Here, destroying the old would obviously preclude its admission to probate; the laws of intestacy would govern. To illustrate, assume wife’s previous will left her entire estate to her second husband from whom she recently separated. Under pressure from her children from a previous marriage, wife changes her will and leaves her entire estate to those children. If wife dies, a will contest would be possible. Admission of the old will (leaving everything to her husband) into probate would be the last thing that wife would want. Since intestacy (where her husband takes half the estate) would be preferable to the old will, it would be prudent for wife to destroy the old will (and any copies). Equitable doctrines may come into play where the revocation of a previous will would work injustice. Under the doctrine of “dependent relative revocation,” the Surrogate may revive an earlier will, even if that will was destroyed, if the revised will is found to be inadmissible based upon a mistake of law. When invoked, the doctrine operates to contravene the statutory rules with respect to the execution and revocation of wills. If the doctrine is applicable, there is a rebuttable presumption that the testator would have preferred the former will to no will at all.
X. Objections to Probate
Objections to probate, if filed, may delay or prevent the will from being admitted to probate. If successful, a will contest could radically change the testamentary scheme of the decedent. To deter will contests, most wills contain an in terrorem clause, which operates to render void the bequest to anyone who contests the bequest. The effect of the in terrorem clause is that the failed bequest is disposed of as if the person making the challenge had predeceased the decedent. Were in terrorem clauses effective, will contests would not exist. Yet they do. Therefore, the bark of such clauses appears to be worse than their bite. Still, there is no more reason not to include an in terrorem clause in a will than there would be for omitting other boilerplate language. The existence of the clause is not likely to upset most beneficiaries’ expectations, and it could cause a disgruntled heir to pause before commencing a will contest. Although some believe that leaving a small amount to persons whom the testator wishes to disinherit accomplishes some valid purpose, doing this actually accomplishes very little. A small bequest to a distributee will neither confer upon nor detract from rights available to the distributee, and consequently would have little bearing on the ultimate success of a will contest. Some testators prefer to use language such as “I intentionally leave no bequest to John Doe, not out of lack or love or affection, but because John Doe is otherwise provided for” or perhaps language stating that the lack of a bequest is “for reasons that are well understood by John Doe.”
XI. Liability and Apportionment of Estate Tax
Who will bear the responsibility, if any, for estate tax is an important — but frequently overlooked — issue when drafting a will. The default rule in the EPTL is that all beneficiaries of the estate pay a proportionate share of estate tax. One exception to the default allocation scheme is that estate tax would rarely be apportioned to property passing to the surviving spouse and which qualifies for the full marital deduction. The technical reason for not apportioning estate tax to a bequest that qualifies for the marital deduction is that it leads to a reduced marital deduction, and a circular calculation, with an attendant increase in estate tax. To qualify for the marital deduction, a bequest to the surviving spouse must pass outright or in a qualified trust. If estate tax is paid from the bequest, then the amount passing outright (or in trust) is diminished. This results in a circular calculation. The same rationale applies to other bequests that qualify for an estate tax deduction, such as a charitable bequest to an IRC Section 501(c)(3) organization. If a large residuary bequest were made to a charity, the testator might want the charity to bear the entire liability for estate tax, even though such a direction in the will would result in a net increase in estate tax liability.
Note that property not included in the decedent’s gross estate is never charged with estate tax, even if the disposition occurs by reason of the decedent’s death (e.g., proceeds of an irrevocable life insurance trust paid to a beneficiary of the trust). This is because under IRC Section 2033, estate tax is imposed on “the value of all property to the extent of the interest therein of the decedent at the time of his death.” Assets not owned by the decedent at the time of his death are not ““interests” within Section 2033, and therefore are not part of his gross estate for purposes of the Internal Revenue Code. The allocation of estate tax liability is therefore within the exclusive jurisdiction of the decedent’s will. The default rule found in the EPTL can be easily overridden by a provision in the tax clause of the will. This gives the drafter flexibility in apportioning estate tax. In a sense, the ability of the will to control the tax consequences of assets passing outside of the probate estate is an exception to the rule that the will governs the disposition only of probate assets. If the decedent dies intestate, the default EPTL provision will control.
In many cases, the testator will choose the default rule under the EPTL, which is to apportion estate tax among the beneficiaries according to the amounts they receive. As noted, no estate tax is apportioned to assets not part of the gross estate even if those assets pass by reason of the testator’s death. For example, the proceeds of an irrevocable life insurance trust are not included in the decedent’s gross estate, and any attempt to impose estate tax liability on the named beneficiary of the policy would fail. However, if the insurance policy were owned by the decedent at his death and passed to either a named beneficiary or was made payable to his estate, the beneficiary (or the estate) could and would be called upon to pay its proportionate share of estate tax, unless expressly absolved of that responsibility in the will. Since the testator is free to change the default rule, the tax clause could direct that estate tax be paid entirely from the residuary estate, “as a cost of administering the estate.” Alternatively, the tax clause could direct that estate tax be paid out of the probate estate, meaning that the estate tax would be apportioned to all persons taking under the will. Alternatively, the will might also be silent with respect to the estate tax, in which case the EPTL default rule would govern.
To illustrate the importance of the tax clause provision, assume the decedent’’s will contained both specific bequests and residuary bequests. Assume further that the decedent owned a $1 million life insurance policy naming his daughter as beneficiary.
If the will is silent concerning estate tax, the default rule of the EPTL would control, and every beneficiary, whether taking under the will by specific or residuary bequests, or outside of the will (i.e., insurance policy payable by its terms to a named beneficiary), would pay a proportionate share of estate tax. If the tax clause instead provided that all taxes were to be paid from the residuary estate as a cost of administration, no tax would be imposed on the daughter who receives the insurance, or on persons receiving preresiduary specific bequests under the will.
XII. Revocable Inter Vivos Trusts as Testamentary Substitutes
Relatively speaking, probate in New York is neither expensive nor time-consuming. Nevertheless, a revocable inter vivos trust is sometimes utilized in place of a will. Avoiding probate may be desirable if most assets are held jointly or would pass by operation of law. In that case, the necessity of a will would be diminished. Other reasons for avoiding probate may stem from considerations of cost or concerns about privacy. While trusts are generally private, wills are generally public. Letters of trusteeship are not required for an inter vivos trust, since the trust will have became effective prior to the decedent’s death, and the trustee will already have been acting. Revocable inter vivos trusts have been said to reduce or estate taxes. While technically true, the assertion is somewhat misleading. While a properly drafted revocable inter vivos trust may well operate to reduce estate taxes, a properly drafted will can also accomplish that objective. Revocable inter vivos trusts do accomplish one task very well: They eliminate the need for ancillary probate involving real property situated in another state.
A revocable inter vivos trust is funded during the life of the grantor (or trustor) with intangible personal property such as brokerage accounts, tangible personal property such as artwork, real property, or anything else that would have passed under a will. Assets titled in the name of a revocable inter vivos trust may reduce costs somewhat in certain situations. Unlike a will, a revocable inter vivos trust operates with legal force during the grantor’s life. When evaluating the potential probate costs that could be avoided using a trust, one should also consider the cost of transferring title of assets to a revocable inter vivos trust. If probate is not expected for many years, the present value of that cost may not exceed the immediate cost of transferring the testator’s entire estate into trust.
Most estate planning tax objectives for persons who are unmarried can be accomplished in a fairly straightforward manner using a revocable inter vivos trust. However, unless the bulk of assets are held in joint tenancy, or titled in some other form that avoids probate, avoidance of probate would not likely justify foregoing a will in favor of an inter vivos trust as the primary testamentary device. Between spouses, “joint” revocable inter vivos trusts have been used to avoid probate. In some community property jurisdictions, of which New York is not one, certain federal income tax advantages among spouses may be achieved by using a joint revocable inter vivos trust. This advantage arises because the IRS may permit a step-up in basis at date of death for all assets held by a joint inter vivos revocable trust in community property states. However, joint revocable inter vivos trusts between spouses have engendered a flurry of private letter revenue rulings from the IRS addressing basis issues. Some of the rulings are adverse. Consequently, use of joint revocable trusts in non-community property states should be avoided.
XIII. Grantor & Nongrantor Trusts
Income tax consequences of a revocable inter vivos trust actually depend on whether the trust is a ““grantor” trust or a “nongrantor” trust for purposes of the Internal Revenue Code. If the revocable inter vivos trust is drafted as a grantor trust — and most revocable inter vivos trusts are — no income tax consequences will result. Two common ways of accomplishing grantor trust status are for the grantor to retain the power to substitute trust assets of equal value, or to retain the right to borrow from the trust in a nonfiduciary capacity without the consent of an adverse party. If either of these powers and rights are contained in the trust, grantor trust status should ensue.
A grantor trust is “transparent” for federal income tax purposes, and the grantor will continue to report income on his income tax return as if the trust did not exist. This is a slight overstatement, as some tax advisors do recommend that the trust obtain a taxpayer identification number even for a grantor trust, and recommend filing an income tax return for the trust, but noting on the first page of the return that “the trust is a grantor trust, and all income is being reported by the grantor.” On the other hand, if the revocable inter vivos trust is drafted as a “nongrantor” trust, then the trust becomes a new taxpaying entity, and must report income on its own fiduciary income tax return. A reason for choosing nongrantor trust status might be a desire to shift income to lower income tax bracket beneficiaries.
A nongrantor trust, for income tax purposes, is a trust in which the grantor has given up sufficient control of the assets funding the trust such that a complete transfer for income tax purposes has occurred. A grantor trust, for income tax purposes, is a trust in which the grantor has not given up sufficient control over the assets funding the trust such that a complete transfer for income tax purposes has not occurred. Both revocable inter vivos trusts “defective” grantor trusts used in estate planning are typically grantor trusts. In both cases the grantor has retained sufficient rights and powers such that the transfer is incomplete for federal income tax purposes.
The difference between the two lies in differing transfer tax consequences when the trust is formed. Where a “defective” grantor trust is employed, the grantor also relinquishes the right to revoke the trust. This makes the trust irrevocable and the transfer complete for transfer (i.e., gift and estate) tax purposes. However, the transfer is still incomplete for income tax purposes. Defective grantor trusts are useful when the grantor wishes to make use of the gift tax exemption to shift appreciation out of his estate, but at the same time wishes to remain liable for the annual income tax generated by trust assets. By remaining liable for income tax, the trust assets will grow more quickly, with no annual income tax burden being imposed on the trust.
XIV. Transferring Assets Into Revocable Inter Vivos Trust
Transferring intangible assets into an inter vivos trust is fairly straightforward: A brokerage or bank account need only be retitled into the name of the trust. So too, ownership of real property would simply require transferring the property by quitclaim deed into the trust. Transferring tangible personal property is more problematic. Care must be taken to execute formal legal documents evidencing the transfer. Only then will the Trustee be comfortable making the distributions called for in the trust to beneficiaries. For example, if valuable artwork is transferred into a revocable inter vivos trust with a flimsy one page undated document, it may be difficult to justify the transfer to the decedent’s heirs at law who may in effect be disinherited by virtue of the trust. In contradistinction, it would be difficult for a disgruntled heir to challenge a specific bequest of artwork in a will.
XV. Irrevocability of Inter Vivos Trust At Death of Grantor
A revocable inter vivos trust may be made irrevocable prior to the death of the grantor. If the trust is a grantor trust, the trust will resemble a “defective” grantor trust discussed above. If the trust is a nongrantor trust, then the transfer will be complete for income, gift and estate tax purposes. A revocable inter vivos trust becomes irrevocable at the death of the grantor, since the grantor, having died, can no longer revoke it. Since Letters of Trusteeship are not required, the Surrogate will not even be aware of the trust. In contrast, the Trustee of a testamentary trust will be required to request Letters of Trusteeship from the Surrogate. In general, unless a transfer is complete for transfer tax purposes, creditor protection will not arise. Therefore, revocable inter vivos trusts have virtually no asset protection value. Since the transfer may be revoked, no transfer for federal transfer tax purposes will have occurred when assets are retitled into the name of a revocable inter vivos trust. A creditor will be able to force the grantor of a revocable inter vivos trust to revoke the trust, thereby rescinding the transfer and laying bare the assets for the disposal of the creditor. It is conceivable that a revocable inter vivos trust drafted as a nongrantor trust would have slight creditor protection, but this would probably be a theoretical point with little practical significance.
XVI. The “Pour Over” Will
What would bring to the attention of Surrogate’s Court the existence of the trust would be the decedent’s “pour over” will, if it were probated. The purpose of a pour over will is to collect and dispose of assets not passing by operation of law at the decedent’s death, and which were not transferred into the trust earlier. If no probate assets exist at the decedent’s death, there would be no reason to probate the pour over will. Where probate of the pour over will is required, the expense of probate, although not entirely avoided, would be reduced.
XVII. Testamentary Trusts
The coverage of wills in the EPTL is extensive, while that of revocable inter vivos trusts is relatively sparse. Although trust law is well developed, it is less developed for revocable inter vivos trusts. Probate lends an aura of authoritativeness and finality to the administration of an estate that is simply not possible where a revocable inter vivos trust is used. In many cases, tax planning is actually more straightforward where a will is utilized rather than an inter vivos trust. For these reasons, most attorneys reserve the use of revocable inter vivos trusts to unique situations where they are peculiarly advantageous as testamentary vehicles. Both credit shelter and marital trusts may be funded at the death of the grantor of a revocable inter vivos trust which becomes irrevocable at death. As noted, revocable inter vivos trusts to a limited extent operate as will substitutes. However, another type of trust may present itself in the will. Many wills contain testamentary trusts. Testamentary trusts are often the foundation of the decedent’s will. Skillful drafting further important estate tax objectives. Testamentary trusts also serve to insulate the assets from potential creditors of the beneficiaries, or may protect the beneficiaries from their own immaturity or profligacy.
Testamentary trusts funded by the will may take the form of a marital trust for the benefit of a spouse, or a credit shelter trust for the benefit of children, grandchildren. The surviving spouse may also be a beneficiary (but not the sole beneficiary) of the credit shelter trust. Testamentary trusts often combine the benefit of holding property in trust with attractive tax features. Note that a revocable inter vivos trust becomes revocable at the death of the grantor. However, the trust is not a testamentary trust because it does not arise at the death of the decedent. It has already been in existence. Nevertheless, testamentary trusts and revocable trusts that become irrevocable at the date of the decedent’s death may operate in tandem, and may, if the terms of the trusts permit, become unified after the decedent’s death.
XVIII. Estate Taxes
Neither property funding a marital trust nor property funding a credit shelter trust will result in estate tax in the first spouse to die. The mechanism for arriving at the incidence of no tax differs: In the case o a marital bequest, the amount is includable in the decedent’s gross estate, but a complete marital deduction will cancel the estate tax. In the case of a bequest utilizing the applicable exclusion amount, no estate tax will arise because Congress or Albany issues a credit nullifying the estate tax liability. As in most areas of the tax law, a credit is preferable to a deduction. In the case of the marital deduction, the property will eventually be included in the estate of the surviving spouse, unless it is consumed by the surviving spouse during that spouses lifetime, or gifted. If consumed, no tax will arise. If gifted, the gift will be subject to federal gift tax.
The largesse of Washington is greater than that of Albany with respect to the applicable exclusion amount: While Washington currently allows $5 million to pass tax-free to beneficiaries other than the spouse, Albany allows only $1 million to pass tax-free at death. Note that there would be no reason to waste the credit for bequests in which only the spouse benefits, since marital bequests can be drafted to qualify for the marital deduction. Both Washington and Albany allow a full marital deduction for lifetime and testamentary gifts to a spouse. There is one catch to the generosity of Washington: The Internal Revenue Code includes in the $5 million applicable exclusion amount lifetime gifts. So a lifetime gift of $1 million would reduce to $4 million the amount that can pass at death without the imposition of estate tax. Furthermore, the gift tax exemption amount may be reduced after 2012. In a rush to complete the tax bill in late 2010, Congress unexpectedly increased the lifetime gift tax exemption from $1 million to $5 million. If President Obama is reelected, there is no assurance that his administration will not seek to reduce the lifetime gift tax exclusion amount.
There is another fundamental difference between the philosophy of New York and Washington concerning transfer taxes: While the IRS taxes lifetime gifts, New York does not. Therefore, making lifetime gifts before 2012 to avoid the inclusion of assets in the estate for New York estate tax purposes makes sense for testators with large estates. Making such gifts now will be neutral for federal purposes (since the applicable exclusion amount applies equally to lifetime and testamentary transfers) but will reduce New York State estate tax by 16 percent of the amount of the gift. (Sixteen percent is the maximum rate of estate tax now imposed by New York.)
XIX. QTIP Trusts & Credit Shelter Trusts
In general, to qualify for a complete marital deduction, property must pass outright or in a qualifying trust to the surviving spouse. A “QTIP” marital trust is such a qualifying trust. The QTIP grants the surviving spouse a lifetime income interest, and perhaps a discretionary right to trust principal. The decedent retains the right to designate ultimate trust beneficiaries, but no beneficiary other than the surviving spouse can have any interest in QTIP trust assets during the life of the surviving spouse. QTIP trusts are sometimes used in second-marriage situations, or in situations where the testator is concerned that the surviving spouse might deplete trust assets leaving few assets for his children. The surviving spouse with an interest in a QTIP trust has the right to demand that the trustee make nonproductive assets productive.
For estate tax purposes, the IRS requires that the estate of the surviving spouse include the fair market value of the assets in the QTIP trust at her death. For income tax purposes, two basis step ups occur: The first at the death of the decedent, and the next basis step up at the death of the surviving spouse. Even though the property in a QTIP trust does not “pass” to the surviving spouse outright, Congress justified marital deduction on the basis of the surviving spouse having a lifetime income interest in the trust, and no other beneficiary having an interest during the life of the surviving spouse. The deduction provided by the Internal Revenue Code for assets funding a QTIP trust is actually an exception to the “terminable interest” rule. That rule provides that no marital deduction can be allowed for a bequest to a surviving spouse of an interest that “terminates.”
The surviving spouse can be given the right to receive discretionary distributions of principal from a QTIP trust for her “health, comfort and maintenance” without triggering adverse estate tax consequences. The surviving spouse may also be given a “five and five” power, which gives the surviving spouse the noncumulative right to demand on an annual basis from the trust an amount which is the greater of (i) five percent of the value of the trust or (ii) five thousand dollars. Giving the spouse more rights than these in a QTIP trust could result in the IRS arguing that the trust no longer qualifies as a QTIP trust. Since the decedent would have retained the right to name ultimate trust beneficiaries, the trust would also not qualify for the unlimited marital deduction as a general power of appointment trust. (If the trust were a general power of appointment trust, the surviving spouse would have the right to appoint trust assets, which she does not in a QTIP trust). Thus, the marital deduction could be imperiled.
A credit shelter trust takes the asset out of both the estates of the testator and the spouse permanently. A surviving spouse may or may not be given an interest in a credit shelter trust. Again, the surviving spouse should not be given too great an interest in the credit shelter trust; otherwise, the IRS could argue that the assets are includible in her estate. Still, it appears entirely reasonable to give the spouse a right to income and a discretionary right to principal for her health, comfort and maintenance. Health, comfort and maintenance are ascertainable quantities generally considered to be within the discretion of the trustee. Accordingly, most courts would not challenge the trustee’s discretion. However, the IRS would be less reluctant to question the scope of the trustee’s discretion if the IRS believed that the trustee had exceeded the scope of his discretion. The credit shelter trust would provide for other beneficiaries. If the intended beneficiaries of a credit shelter trust were older, then the testator would likely have creditor protection objectives in mind when deciding to leave assets to his mature children in trust rather than outright.
Funding the credit shelter trust within the will involves determining how many assets the surviving spouse may need. Until a few years ago, when the applicable exclusion amount was less than $5 million, it was sometimes desirable to fund the credit shelter trust with the maximum amount, thereby removing the assets from the estate of both spouses.
With the federal applicable exclusion amount at $5 million, maximizing the amount funding the credit shelter trust may operate to reduce or eliminate an alternate bequest to the surviving spouse. On the other hand, if the credit shelter trust is underfunded and the marital trust overfunded, the estate of the surviving spouse might needlessly become subject to New York estate tax. In the majority of cases tax considerations are secondary — as they should be — to the desire of the decedent to provide for his or her spouse. Use of a disclaimer provides post-mortem flexibility, in that it allows the surviving spouse to renunciate assets not required, with extremely favorable transfer tax consequences.
In general, if a person executes a written disclaimer within nine months of the decedent’s death, and has not accepted any of the benefits of the disclaimed assets, then the property will pass as if the disclaimant had predeceased. A significant transfer tax benefit may result from a properly executed a disclaimer. If a person accepts a bequest, and then decides to transfer the bequest, a taxable gift will have been made. In contrast, if the person disclaims the bequest, no taxable gift has occurred, since the person never received the property.
Although a disclaimant may not direct property to a specific person, the will may be drafted to contain specific language providing that a disclaimer made by a surviving spouse could fund a credit shelter or other trust in which she is a beneficiary. The language might provide that the surviving spouse’s disclaimer would add to or fund a credit shelter trust in which she is a lifetime beneficiary. If the surviving spouse is given an income interest in a trust into which she disclaims, this may increase the likelihood that she will disclaim. This may reduce or eliminate estate tax at her death, yet still provide her with lifetime enjoyment of trust assets. If the surviving spouse cannot be relied upon to disclaim what she will not need, the trustee’s discretion with respect to distributions of principal from a credit shelter (or other) trust may serve to adequately protect the interest of other beneficiaries, such as the children.
The reasons for a disclaimer are legion, and they are by no means limited to situations involving taxes. A disclaimer may also be made to protect assets from claims of creditors. In some jurisdictions, such as New Jersey, a disclaimer that works to defeat the rights of creditors is fraudulent. However, in New York a disclaimer made to defeat the rights of a creditor is valid. However, a disclaimer cannot work to defeat the rights of the IRS if the named beneficiary under the will exercises the disclaimer to defeat the those rights. Drye v. U.S., 428 U.S. 49 (1999).
XXI. The Right of Election & Testamentary Substitutes
A will may be used to disinherit children, but not a spouse. Divorce will not invalidate a will, but will have the effect of treating the former spouse as if she had predeceased. On the other hand, a disposition made to a former spouse following a divorce — or even a bequest made prior to a divorce but expressly stating that the bequest survives divorce — would be valid. In New York, the surviving spouse must be left with at least one-third of the testator’’s estate. Otherwise, the surviving spouse may “elect” against the will, and take one-third of the “net estate.” If the elective share of the surviving spouse exceeds what the surviving spouse received under the will or by operation of law, the estate of the decedent will be required to pay the electing spouse that difference. If the property was already transferred to another person, the statute would appear to require that the transfer be rescinded.
If a spouse wished to circumvent the rule that he or she bequeath at least one-third of his or her estate to the surviving spouse, this could theoretically be accomplished by making gifts before death of large portions of the estate. To foreclose this opportunity to avoid the elective share rule, the legislature created the concept of “testamentary substitutes.” The net estate, which is the basis upon which the elective share operates, includes “testamentary substitutes” in addition to other assets comprising the decedent’s estate. If the decedent dies intestate, testamentary substitutes are generally those assets which the decedent transferred before death, which are no longer part of his probate or nonprobate estate.
The intent of the legislature in creating the concept of testamentary substitutes was to protect the surviving spouse from the intentional depletion of the decedent’s estate by means of lifetime transfers occurring before the spouse’’s death. Although the definition of testamentary substitutes operates primarily on transfers made in the year before the decedent’s death, some transfers qualifying as testamentary substitutes may have been made years earlier. Life insurance is not a testamentary substitute. Thus, the purchase of a life insurance policy within a year of death will not be part of the net estate for calculating the elective share, even if the beneficiary is other than the surviving spouse. It is believed that the reason life insurance is not within the statutory class of testamentary substitutes is not based upon any legally distinguishable characteristic of life insurance, but rather on the reality that were it so classified, the life insurance industry would be adversely affected.
The concept of testamentary substitutes, although primarily operating to prevent depletion of the net estate for elective share purposes, is not limited to protecting rights of the surviving spouse: The statute provides that testamentary substitutes include transfers “whether benefiting the surviving spouse or any other person.” Thus, if an elective claim were made by a surviving spouse, a child could argue that a transfer made years earlier by the decedent to the surviving spouse was actually a testamentary substitute. The child’s argument, if successful, would augment the net estate with respect to which the surviving spouse would be entitled to one-third.
However, since the surviving spouse would already hold title to the property constituting a testamentary substitute, this would “count” toward her elective share. Thus, for elective share purposes, the surviving spouse would be entitled only to one third of an asset already owned by her. This could result in the elective share being less than what the spouse otherwise received under the will or by operation of law. In that case, the spouse would simply forego the elective share. In general, the categorization of a transfer as a testamentary substitute works to the disadvantage of the electing spouse if she already owns a significant number of assets that may be susceptible to being classified as a testamentary substitute. This is because the entire value of the asset will “count” toward meeting her one-third elective share.
To illustrate, if a spouse transfers title to the marital residence but retains the right to enjoy or possess the property during his life, the transfer may be deemed to constitute a testamentary substitute. The inclusion of the residence would increase the size of the net estate with respect to which the surviving spouse would be entitled to a third. Being in title to the residence, its entire value would count toward satisfying the requirement that the surviving spouse receive one-third of the net estate. A spouse may waive the statutory right under EPTL 5-1.1A to elect against the will of the other spouse or, may under EPTL 4-1.1, may waive the right to one-half of the spouse’s estate in the event of intestacy.
XXII. Residuary & Preresiduary Bequests
There are two classes of bequests: preresiduary bequests and residuary bequests. Preresiduary bequests, which generally consist of specific bequests, are sometimes easier to administer than residuary bequests. Specific bequests of tangible personal property are almost always pre-residuary bequests. Specific bequests might also be made of intangible personal property, such as money or bank accounts. However, to the extent money, bank or brokerage accounts are not disposed of by specific bequest, they will be disposed of in the residuary estate.
A “bequest” then is gift of under the decedent’s will. A “legacy” is a bequest of personal property, while a “devise” is a bequest of real property. An “inheritance”” as it is typically thought of is somewhat of a misnomer, since it refers to real or personal property received by heirs pursuant to the laws of descent (intestacy). However, a nontechnical meaning of “inheritance” refers to bequests under the will. The failure to use the correct term (e.g., referring to a bequest of land as a legacy) in a will would of course not defeat the bequest.
When administering the estate, the Executor will first determine specific bequests to be made from probate assets. Every probate asset in the decedent’s estate not disposed of by specific bequest will fall into the residuary estate, and be disposed of pursuant to the terms therein. A residuary bequest might resemble the following:
I give, bequeath and devise all the rest, residue and remainder of my estate, both real and personal, of every nature and wherever situated . . . which shall remain after the payment therefrom of my debts, funeral expenses, expenses of administering my estate and the legacies and devises as hereinafter provided, to the following persons in the following proportions:
The will should also contain a provision dealing with simultaneous deaths. The will would typically provide that if any disposition under the depends on one person surviving another, if there is insufficient evidence concerning who died first, the other person will be deemed to have predeceased. An example would be where the decedent and his spouse die simultaneously, such as in an airplane or car accident. Here, the effect of the provision would be to assume for purposes of the decedent’’s will the spouse predeceased. The will may also impose a general requirement of survivorship. Thus, the instrument may require as a condition to taking under the Will that the person survive for a period of period of time (e.g., 90 days) following the death of the decedent. The reason for inserting the requirement if the beneficiary died soon after the decedent the decedent would rather that the bequest be made to other beneficiaries under his will rather to the beneficiary under his will who died before the estate was administered.
The residuary estate is often, though not always, disposed of by making gifts of fractional, rather than pecuniary amounts, to various persons either outright or in trust. If the bequest is made in trust, the “rule against perpetuities” prevents the creation of perpetual or “cascading” trusts. Black’s Law Dictionary defines the rule against perpetuities as
[t]he common-law rule prohibiting a grant of an estate unless the interest must vest, if at all, no later than 21 years (plus a period of gestation to cover a posthumous birth) after the death of some person alive when the interest was created.
[The rule has its origin in the Duke of Norfolk’s case decided by the House of Lords in 1682. The Lords believed that tying up property for many generations was wrong. A few states, among them New Jersey, have abolished the common law rule by statute. Other states, among them New York, have codified the common law rule. Still others have taken different approaches. Delaware has eliminated the rule by statute for real property, and has extended the vesting period for personal property from 21 years to 110 years. Forward-looking Utah has not abolished the common law rule, but has extended the vesting period to 1000 years. Finally, some states have adopted the “Uniform Statutory Rule Against Perpetuities,” which limits the vesting period to 90 years.]
XXIII. Formula Bequests
A formula bequest is a bequest utilizing a formula specified in the will to determine the amount of the bequest. The formula might provide that the credit shelter trust be funded with the maximum amount that can pass free of federal estate tax, or the maximum amount that can pass free of federal or state estate tax. Formula bequests to a credit shelter or marital trust could be structure as either preresiduary or a residuary bequests.
Today, funding a credit shelter trust with the maximum amount that can pass free of federal estate tax would result in $5 million being allocated to the trust; funding the trust with the maximum amount that would result in no federal or New York estate tax would result in funding the trust with only $1 million. This is because the maximum amount that can pass free of New York State estate tax is only $1 million.
Depending on the size of the decedent’s estate, foregoing $4 million in a federal credit to save $640,000 (.16 x $4,000,000) may or may not make sense. If the decedent and his spouse are elderly and their estate is very large, wasting $4 million of the federal credit at the death of the first spouse may actually result in more federal estate tax in the future. In general, if the couple wishes to reduce estate tax to zero at the first to die, the credit shelter trust will not be funded with more than $1 million. However, one loophole the width of the lower Hudson does exist: Gifting the $4 million during life and leaving the other $1 million at death will result in no federal tax, because the applicable exclusion amount equals the total of both lifetime and testamentary transfers. The $4 million gift will not be subject to New York gift tax, since New York has no gift tax. At the death of the first spouse to die, the credit shelter trust can be funded with $1 million. Essentially, the $640,000 in New York estate tax will have been avoided at no cost.
However, the testator must actually make a gift of this money during his lifetime. The reality is also that most people with estates of $5 million are generally not willing to make gifts of $5 million.
As is readily seen, small variations in language can have important funding consequences. It is for this reason that older wills should be periodically reviewed to ensure that they fund the appropriate trust with the proper amount. If the language of the will were clear, neither the Executor nor the Surrogate would have the power to redraft the will.
For example, if the will of a decedent who died in 2009 provided in a preresiduary bequest that the credit shelter trust was to be funded with the maximum amount that can pass free of federal estate tax, the Executor would clearly be required to fund the trust with $3.5 million, if the estate had sufficient assets.
However, if the decedent with the same will died in 2010, this language would be problematic, since the estates of persons dying in 2010 could elect out of the estate tax. If an election out of the estate tax were made, would the Executor be required to fund the trust denominated in the will as a credit shelter trust, since nothing would be needed to reduce federal estate tax to zero? Even if it were assumed that the Executor were required to fund the trust, what amount would he be required to transfer to the trustee? Would the amount be the amount which the Executor would have been required to fund the trust with had the estate not elected out of the estate tax?
Another equally troubling question exists: If the election out of the estate tax results in no estate tax, but increases the future income tax liability of certain beneficiaries, how is the estate required to allocate future built-in income tax gain? These questions might require the Executor to make difficult decisions and surmise what the intent of the decedent was. While it would be appropriate for a fiduciary to make these determinations, it would be preferable if the will were clear.
The problem of basis arises because as a condition to electing out of the estate tax, the Executor must “carry over” the basis of estate assets, rather than receive a step-up. This problem is mitigated somewhat by a provision allowing the Executor to step up the basis of $1.3 million for assets passing to anyone. The Executor may also step up the basis of assets worth $3 million passing to the surviving spouse.
XXIV. Pecuniary and Specific Bequests
A pecuniary or specific bequest is said to ““lapse” if the named beneficiary predeceases. A specific bequest is said to “adeem” if the subject matter of the bequest no longer exists at the decedent’s death. Another instance in which a bequest might fail is where there has been an “advancement.” An advancement occurs where the decedent makes a testamentary bequest, but “advances” the bequest to the beneficiary before death. For a gift to constitute an advance, it must be clearly demonstrated that the decedent intended it to be so, and the presumption is against advancements.
Specific bequests of personal property or cash must be worded carefully. Assume that the testator wishes to leave $50,000 to his aunt Matilda. The bequest might be drafted in the following way:
I leave to my aunt Matilda the sum of $50,000.
If Matilda is alive at the decedent’s death, she will receive $50,000. If Matilda has predeceased, most agree that the bequest should be paid to the estate of Matilda.
Suppose instead that the bequest was phrased in the following way:
I leave to my aunt Matilta the sum of $50,000, if she survives me.
Here Matilda would receive $50,000 if, and only if, Matilda survived the decedent. If Matilda predeceased, the bequest would lapse, and Matilda’s estate would take nothing.
If the decedent had intended for Matilda’s issue to benefit in the event Matilda predeceased, then the following language might have been employed:
I leave the sum of $50,000 to Matilda, if she survives me, or if not, to her issue, per stirpes.
The term per stirpes is latin for “by the root.” Assume Matilda bore three children, one of whom predeceased her, leaving two children. In that case, Matilda’s bequest would be divided into thirds. Her two surviving children would each take a third, and her two grandchildren (from the predeceasing child) would each take one-sixth (half of her predeceasing child’s one-third share).
The will might also have provided that the bequest be made
to Matilda if she survives me, or if not, to her issue, per capita.
The term per capita is latin for “by the head.” Assume again that Matilda bore three children, one of whom predeceased her leaving two children. Here, the bequest would be divided into four, with Matilda’s two children each taking one-fourth, and Matilda’s two grandchildren each taking one-fourth. Few testators choose per capita dispositions.
The will could also generally provide for the issue of Matilda in the event Matilda predeceased, without specifying whether the bequest was per stirpes, or per capita. Such a bequest could be made in the following way:
I leave the sum of $50,000 to Matilda if she survives me, or if not, to her issue.
In this case, the issue would take by “representation.” Assume Matilda had three children, two of whom predeceased. One predeceasing child bore one child, and the other predeceasing child had nine children. Matilda’s surviving child would take one-third, the same amount the child would take if the bequest had been per stirpes.
However, something else happens at the generational level of the grandchildren: Each grandchild would take a one-tenth share of the two-thirds not passing to Matilda’s surviving child. Thus, the bequest could be thought of as per stirpes at the children’’s level, and per capita at the second generation level, that of the grandchildren. Notice that Matilda’s surviving child will receive the same as she would have received had her siblings not predeceased Matilda. Yet, also notice that the grandchildren are not taking “by the root,” but rather “by the head.”
Of course, it would also be perfectly appropriate if the will provided that the grandchildren would take by representation if Matilda and at least one of her children predeceased. In that case, the will would state
I leave $50,000 to Matilda, if she survives me, or if not, by right of representation.
If the $50,000 bequest were made to Matilda out of a specified Citibank account, Matilda would receive the $50,000 if and only if (i) the Citibank account existed at Matilda’s death and (ii) the account had sufficient assets to satisfy the bequest. If the account no longer existed, the bequest would “adeem”. If the account existed but had insufficient funds, the bequest would “lapse” to the extent of the deficiency.
A bequest may also be made of intangible personal property, such as a bank or brokerage account. The same rules apply to such bequests: If the bank account is no longer in existence, then the bequest will have adeemed, since it is no longer in existence at the time of the decedent’s death.
Bequests of items of tangible personal property would be made in the following way:
I leave my antique Chinese vase to my son Albert, if he survives me, or if not, to my daughter Ellen.
Here, if Albert predeceased, then the vase would go to Ellen, if she survived. If both predeceased, the vase would go to the estate of Ellen, pursuant to the terms of her will. If her will were silent concerning the vase, it would be disposed of pursuant to her residuary estate. If Ellen died intestate, the vase would go to Ellen’s heirs at law. If Ellen died leaving no heirs, the vase would ““escheat” to New York. Escheat means that the property reverts to the state or sovereign.
Many are of the belief that if they die intestate, all of their property escheats to the state. Nothing could be more untrue. Dying without a will is disadvantageous for many reasons, however, dying intestate simply means that the estate will pass to the decedent’s heirs at law. For some testators without closely related heirs, this might be a fate worse than the property reverting to the state. Often, wealthy persons without close heirs make large charitable bequests, rather than have their estate claimed by distant heirs whom they may not even know of. Naturally, if the testator owns two Chinese vases, the vase which is the subject of the bequest should be identified with particularity to avoid problems of identification for the Executor. Typically, the Executor will be given “unreviewable discretion” with respect to these determinations, as well as most other determinations requiring the Executor’s discretion when administering the decedent’s estate.