It is becoming more frequent for one spouse to be a non-citizen of the United States. A different set of rules applies to non-citizen spouses than to US citizens, even if the non-citizen spouse has resided in the US for many years, and even if he or she has children who are US citizens.
When it comes to basic estate planning, residents who are non-citizens should have documents similar to those of citizens. The estate of a resident spouse who is a non-citizen must be administered in the United States, just like the estate of a US citizen, and the same rules generally apply to estate tax returns for non-citizens as for citizens. Both spouses should have wills, durable powers of attorney for financial matters, health care powers of attorney, declarations of desire to die a natural death, and sometimes revocable trusts, just like spouses who are both U.S. citizens.
A US citizen can leave property to someone who is not a US citizen or a resident, the same as he or she can leave property to US citizens. This applies not only to wills, but also to joint bank accounts, retirement accounts, life insurance, etc. However, there are some tax issues and complications about which married couples, one of whom is a non-citizen, should be aware – especially if they have high net worth, but in some instances when they have moderate wealth.
PROPERTY TRANSFERRED TO A NON-CITIZEN SPOUSE
The most notable differences between estate planning and estate administration, where there is at least one non-citizen spouse – as contrasted with estates with two spouses who are both US citizens – concern gift and estate taxes. A US citizen or resident may make unlimited transfers of assets – either during life or at death – to a spouse who is a US citizen, without gift or estate tax consequences, but if one spouse is a noncitizen, (a)transfers to the non-citizen at death generally do not qualify for the estate tax marital deduction, and (b)lifetime transfers to a US citizen or resident to a non-citizen spouse without gift tax consequences are limited per year to $155,000 in 2019, indexed for inflation in the future – which is generous, but is not unlimited.
The simplest and best way to deal with tax issues arising out of the fact that one spouse is not a US citizen would be for the non-citizen to apply for US citizenship. He or she does not necessarily have to give up citizenship in his or her native country. The US allows dual citizenship, but some countries do not. A person with dual citizenship gets all the tax benefits of being a US citizen.
In the planning process for a married couple, one of whom is a non-citizen and does not want to apply for citizenship, the tax benefits of making gifts to the non-citizen spouse within the annual gift tax exclusion limit, should be considered as a possible useful tool.
Because the threshold for estate tax is so high ($11.4 million in 2019 and indexed for inflation) it is not important for most of us to utilize the estate tax marital deduction in our planning, but (a) for couples with high net worth, estate taxes may be a very important consideration, and (b) the current lifetime exemption is scheduled to expire in 2025, and it is possible that the laws could be re-written before that date, so it is advisable to consider addressing those possible eventualities in one’s estate planning.
When both spouses are U.S. citizens, the first spouse to die can leave any amount of money or other assets to the surviving spouse, either outright or in a “marital trust,” completely free of estate tax. By utilizing the unlimited marital deduction, a couple can completely avoid federal estate taxes at the first spouse’s death, even if the deceased spouse has an extremely net worth. If the surviving spouse is a non-citizen, on the other hand, the transfers from the decedent to the surviving spouse will not automatically qualify for the estate tax marital deduction, and other steps must be taken, if the deceased spouse has a large estate, to avoid unnecessary estate tax.
Those assets may be made to qualify for the estate tax marital deduction, even after the death of the US citizen or resident spouse, if (a) the surviving spouse becomes a U.S. citizen on or before the filing deadline for the decedent’s federal estate tax return (within nine months after the date of death unless a six-month filing extension is obtained, in which case the filing deadline would be 15 months after the date of death, instead of nine months), or, (b) in the alternative, those assets are put into a Qualified Domestic Trust (QDOT) for the benefit of the surviving spouse prior to that estate tax filing deadline, and a QDOT election is made on a timely-filed estate tax return for the decedent.
Because there may be unexpected delays in an application for citizenship, a QDOT trust agreement should be drafted in favor of the noncitizen spouse, even if the spouse has applied for citizenship, and if the citizenship application has not been approved some time prior to the filing deadline, the assets should be transferred to the QDOT. If the QDOT is created and funded in a timely manner, and if the appropriate tax election is made on the Form 706, US Estate Tax Return for the decedent’s estate, the QDOT assets would qualify for the unlimited marital deduction.
If a surviving spouse becomes a US citizen after the QDOT has been created and funded, the trust assets may later be distributed to the spouse and the trust terminated, if the terms of the trust agreement so allow.
BEWARE “TAX TRAP” WHEN A DECEASED SPOUSE IS A NONRESIDENT ALIEN
Because the lifetime gift and estate tax exemption applicable to a U.S. citizen or resident is so high ($11.4 million in 2019), many people (including many attorneys) are not aware that a different set of rules is applicable to “US-situated” assets belonging to nonresident aliens, including spouses of U.S. citizens, and they may have to pay extremely high estate taxes, if a nonresident alien spouse dies first and leaves his or her “US-situated” assets in a manner which does not qualify for the estate tax marital deduction.
An estate tax return (Form 706-NA) must be filed if a nonresident alien’s “US-situated” assets exceed $60,000 in value – a much lower threshold than one might expect. “US situated” assets include real estate, tangible personal property (i.e., “things” like jewelry, furniture, collectibles and home furnishings) in the United States, and securities of U.S. companies. Certain countries have treaties with the U.S. government, which may impact the taxation of those assets.
Please note that lifetime taxable gifts made by a nonresident alien are taken into consideration in determining whether or not the tax filing threshold for an estate tax return has been met, as lifetime taxable gifts are included in the taxable assets belonging to a deceased nonresident alien. That is, gift tax and estate tax are unified for nonresident aliens in much the same manner as for US citizens and residents, but with a much lower exclusion amount.
Property left by a nonresident alien spouse to a spouse who is a US citizen will qualify for the estate tax marital deduction on the Form 706-NA, Federal Estate Tax Return for Nonresident Aliens, but property left to a non-citizen spouse must be put into a Qualified Domestic Trust (QDOT) and all the QDOT requirements must be met, in order to qualify for the estate tax marital deduction on the estate tax return for a nonresident alien decedent. If the deceased spouse is a nonresident alien, there is a good possibility that the other spouse will be a US resident only, instead of being a US citizen, so special care should be taken in order to qualify property left to a non-citizen spouse for the estate tax marital deduction. .
A determination as to which assets are “US-situated” assets and which are not, is often difficult to determine – that is, which assets may be subject to US estate tax for the estate of a nonresident alien. For example, currency which is physically located in the United States is subject to estate tax, but cash deposits in US banks are not subject to estate tax. Go figure?? It is possible that bonds would be taxable if owned directly by the decedent, but would not be taxable if owned by a partnership which is not subject to US estate tax.
Consequently, we recommend that you consult with an experienced tax professional concerning possible estate tax on US-situated assets for a nonresident alien.
This material is intended for informational purposes only and should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified tax professional.
If a loved one passes away, and after the funeral and other personal matters have been attended to, someone needs to determine whether an estate administration will be needed, whereby a personal representative for the decedent (usually called an “executor” or “administrator”) will be appointed by the probate court (the Clerk of Superior Court in North Carolina) to pay debts, funeral and administration expenses, file tax returns, etc., and to distribute the remaining assets to devisees (under a will) or to heirs (if there is no will).
Whether or not you make an appointment with our office, we suggest that you make a copy of the attachment linked to this article, titledItems to Bring to Your Initial Appointmentand gather the information included on that list, in order to determine how to proceed. That information will be needed to determine whether an estate administration will be needed or is not needed. If you would like, an attorney in our office will be happy to meet with you to make such determination.
A North Carolina Will should be filed and probated in the office of the Clerk of Superior Court in the county of the Decedent’s residence. The word “probate” has two common meanings concerning estates: The first is that the probate of a will is the process by which the Probate Court determines a Will to be valid or not valid. If valid, the Court “probates” the Will, or certifies it to be the Decedent’s Will; we will refer to this meaning as “certification,” in an effort to minimize confusion. The second meaning of “probate” refers to the process by which the estate of a decedent is administered, i.e. The probate of an estate is the administration of the estate with the Court. We will refer to this meaning as “administration,” to minimize confusion.
If there are no assets or very few assets in the Decedent’s name, it may be possible to avoid a full administration of the Decedent’s estate. For example, it may be possible to have the title to a motor vehicle transferred to a new owner without having to go through a full estate administration. Likewise, tax or medical refund checks can often be cashed without a full administration of an estate, but other procedures will need to be followed. See linked article describing alternatives to full administration of a decedent’s estate.
Please be aware that assets payable at death to a named beneficiary, or assets owned in joint names by co-owners with survivorship rights, etc. are generally not required to go through a full administration in Probate Court. Also, real estate left to specific individuals under a Will generally goes directly to the named individuals, and does not technically go through court administration, but if title is to be transferred by those individuals within two years after death, it will usually be necessary to have an administration of a decedent’s estate. In that case, an Executor would be appointed by the Court, who could release the real estate from potential creditors’ claims.
If you gather the information shown in the Items to Bring to Your Initial Appointment, our office will be happy to meet with you and advise you whether or not a full administration will be needed, and to discuss what you will need to do.
Whether or not a full administration is required, the original Will should be filed with the Court and certified by the Court to be a valid will. Occasionally assets are overlooked at the time of death and are discovered later, perhaps years later, in which case it is easier to transfer those later-discovered assets to the proper recipients if the will was certified to be a valid will shortly after the date of the decedent’s death, rather than waiting until later to have the will probated.
If you have a preliminary meeting with our office to evaluate what you will need to do to settle a Decedent’s Estate, you will not be required to retain our firm to represent you. You may go to another attorney or even try to administer the estate by yourself without an attorney, if you wish.
When someone dies, the person who will be responsible for handling the estate needs to look for the deceased person’s original will and to have it filed with the probate court (the Office of the Clerk of Superior Court in North Carolina) in the county where the decedent resided.
If there is a will, the will probably names an executor, who will be responsible for handling the estate. If there is no will, the closest family member will generally be responsible for handling a decedent’s estate and will be called the “administrator,” rather than the executor.
If you do not know whether there is a will, the person or people who were closest to the decedent should look for a will and take responsibility for it, if one is found.
If you do not know where to look, look in places like desk drawers, file cabinets, and boxes of personal papers at home (or at work, if applicable). Some people keep wills in a safe deposit box at a bank or credit union, but it may be difficult to access the box unless you are a co-owner or you have been specifically given access by the decedent by signature card at the bank or credit union. If you locate a box and cannot access it, you may need to contact the office of the clerk of court for permission to enter the box.
If you know who the decedent’s lawyer was, the lawyer may have the original signed Will, so you should contact him or her, or notify him or her of the decedent’s death. If the lawyer has the will, he or she may insist on filing it with the court himself, instead of giving the original to you, but the lawyer should be willing to give a copy to the named executor.
If you find a copy of the will, but cannot locate the original, and if the attorney does not have the original or notes which indicate where the original was to be kept, one possible place to check is with the probate court in the county where the decedent was residing at the time the will was written, as well as the county where he or she resided at death. The Office of the Clerk of Superior Court in North Carolina will hold original wills filed for safekeeping. The clerk’s office will not give you the original will if one is being held there, even if the decedent had moved to a different county before his or her death, but will advise you if they have a will and they will cooperate with the clerk’s office in the county of the decedent’s residency at death. Most jurisdictions permit a later discovered will to be admitted to probate, even though a previously probated will has not been set aside. There are no specific procedures in the North Carolina General Statutes dealing with the situation. The clerk of court is vested with exclusive original jurisdiction over wills, but will caveats or probates in solemn form can eventually be determined by a superior court judge. North Carolina case law appears to require the first will to be set aside before the second will can be admitted to probate, since the probate of the second will is considered to be a collateral attack upon the probate of the first will. This presents a conundrum, or a chicken-or-egg problem, concerning how one should proceed.
Since there are no guidelines in the General Statutes, different counties may follow slightly different procedures. We suggest filing the second will with the clerk of superior court, who may decline to proceed until a caveat or probate in solemn form of the first will has been concluded. But the upshot is that the first will can be set aside, and the second will can eventually be probated.
Wills are typically headed by a title like, “Will of John Doe” or “Last Will and Testament.” A will which was prepared by a lawyer might be stapled to a piece of colored paper (often blue or gray) and might be kept in an envelope marked “Will” or “Estate Planning Documents”, etc.
You might find a handwritten document, which may or may not be titled as a will, but the substance of which may actually be a will. Handwritten wills (called “holographic” wills) may be valid in North Carolina under certain circumstances. Sometimes, a signed document which simply says “I leave my personal residence to Mary Doe” might be a valid will, even though it is not titled as a will. Holographic wills must be 100% in the Testator’s handwriting and holographic wills are not witnessed. If a handwritten will is witnessed, it must be probated as a witnessed will.
Holographic wills in North Carolina should be kept with the decedent’s valuable papers or given to a third party, to hold for safekeeping.
“Codicils” are documents which change or add to the terms of a will without entirely revoking the prior will. Most people simply write new wills and revoke their old ones, but sometimes they write codicils, instead. Each apparent codicil should be filed for probate with the probate court. Codicils may be witnessed, just like a will, or they may be handwritten. Holographic codicils are subject to the same rules as holographic wills. A witnessed will may be modified by a holographic codicil. Both documents must be probated by the probate court.
Whether or not a full estate administration is necessary, the person who has possession of the original will must file it with the probate court in the county of the decedent’s residence after the death of the will-maker (the “Testator”) .
If you find only a copy of the will and cannot find the original, it is possible that you can file the copy with the probate court and present evidence that it should be accepted as the original. To prevail, however, you will need a credible explanation as to why the original document is not available, and to present evidence to that effect.
If you have reason to believe that someone has an original will but does not want to produce it, you can ask the clerk of superior court to bring that person in front of a probate judge, and to produce the original will.
It is suggested that you ask an experienced probate attorney to assist you.
It is more common now than it was, even a few years ago, for United States citizens to make financial provision in their estate planning documents for non-US citizens and nonresidents of the United States.
We have linked an article concerning Qualified Domestic Trusts (QDOT’s) for noncitizen spouses of United States citizens or residents. Bequests to non-citizens do not qualify for the federal estate tax marital deduction, even where the noncitizen spouse has been married to a US citizen or resident and has been living in the United States for many years. Perhaps he or she has several children who are US citizens. That discussion deals with United States Estate Tax, which is a special tax on large transfers of wealth from a person at death to other persons, which is separate and apart from income tax. Large lifetime gifts to non-citizens, including non-citizen spouses, are subject to United States Gift Tax, linked is a discussion of Gift Tax, Estate Tax and GST tax. Gift Tax was originally adopted to prevent individuals from avoiding Estate Tax by making lifetime gifts. Estate Tax and Gift Tax work in tandem with each other.
This article deals with a tax with which most of us are very familiar – income tax. The rules are very complicated for nonresident alien beneficiaries of US estates and trusts, as discussed below.
That is, this article discusses the income tax complications when an estate or trust has beneficiaries who both are noncitizens and nonresidents of the US – called nonresident aliens.
For income tax purposes, a non-US citizen who is a resident of the US pays income tax on his or her income just like citizens, and he or she is considered a “US Person” for income tax purposes.
Beneficiaries may be classified for US tax purposes as “US persons” and not as nonresidents, under certain fact situations. US persons include United States citizens, resident aliens (holders of green cards), and residents who meet the “substantial presence” test (generally those in the United States for 183 or more days each year over a 3-year period), or residents of Mexico or Canada who regularly commute to jobs inside the US. Others who may be classified as U.S. persons include certain government-related individuals, certain teachers and students, and some individuals with medical conditions which were originally contracted within the United States.
Generally traditional estate planning tools such as wills, trusts, life insurance, Section 529 educational savings plans, and annual gifting may be used for transfers to nonresident beneficiaries who are not US citizens. Some financial institutions require the completion of special forms and registrations for life insurance or for brokerage accounts that are payable to a nonresident alien beneficiary. But the transfer of income-producing assets to nonresidents can create income tax complications, whether or not they pass through an estate or trust.
Naming nonresident aliens as beneficiaries of US estates or trusts can be tricky because they may be subject not only to US tax laws, but also the laws of the country where foreign beneficiaries reside. There may be US taxes to be paid and/or taxes of the foreign country, and there are regulations, tax treaties, tax credits, etc. which may be applicable.
When a decedent dies and leaves assets to foreign beneficiaries, the executor or administrator of the decedent’s estate must determine the tax status of each foreign beneficiary, and whether it is necessary to withhold United States income tax on distributions of income from the US estate to each foreign beneficiary. The executor or administrator is required to file tax forms which are not required for estates that have no foreign beneficiaries.
Similar issues arise when a trust is created which has nonresident beneficiaries. Unlike most decedents’ estates, which are temporary in nature, trusts often last many years, during which time the trust must continue to comply with the laws of the United States and the laws of the applicable foreign country or countries.
In order to determine the tax status of a foreign beneficiary, the executor, administrator or trustee (collectively as referred to as Fiduciary) should provide to each foreign beneficiary a Form W-8BEN, to be filled in by the beneficiary and returned to the Fiduciary. That form requires the name of the individual beneficiary, his/her country of citizenship, personal residence address and mailing address, and foreign tax identification number, if any. If a foreign beneficiary also has a US Tax Identification Number (e.g. SSN), it must be included also.
Generally, a Fiduciary can rely on the information provided by the foreign beneficiary on that form for up to three years, but a new Form W-8BEN must be obtained from each foreign beneficiary every three years, updating his/her information, if he or she remains an income beneficiary.
The withholding rate for income distributions to foreign beneficiaries is usually 30%, which a Fiduciary is required to withhold from income distributions. The Fiduciary has a legal responsibility to pay those withheld income taxes to the United States Treasury each year. In many instances the foreign beneficiary receives a deduction or credit on his or her income tax return in his or her home country for US taxes paid, which softens the impact of the high US withholding tax rate but that does not simplify the filing requirements for the Fiduciary.
Withholding tax is required for a foreign beneficiary, for income which is distributed to the beneficiary – as a general rule there is no withholding tax on distributions of principal, such as a monetary bequest which does not include income earned on the monetary amount.
The withholding rates for some countries are sometimes less than 30%, due to tax treaties between the United States government and the foreign country. The rules for tax credits also vary from country to country.
Another complication for a US estate or trust is the requirement that the estate or trust must file Forms 1042, 1042-T and 1042-S in a timely manner for each applicable tax year. Form 1042 concerns how much income will be withheld for income tax withholding purposes for US-source income, for tax withholding purposes. Form 1042-S is concerned with payments of US source income made to foreign persons, and a separate Form 1042-S is required for each beneficiary. Form 1042-T is the Annual Summary and Transmittal of Forms 1042-S for the estate or trust.
Nonresident aliens who have US income from an estate or trust are required to file a Form 1040NR or a Form 1040NR-EZ in the United States, as well as any necessary tax filings in the beneficiary’s home country.
In summary, it is important for someone administering an estate or trust to know of these requirements when there are foreign beneficiaries of the estate or trust. They should also be aware of foreign beneficiaries of retirement accounts or life insurance policies, or persons who will receive assets as a surviving co-owner of assets, even if those assets do not go through probate. Often even an experienced estate planning or administration professional should seek advice and assistance from other professionals who deal regularly with nonresident beneficiaries.
Estate Tax, Gift Tax and Generation-Skipping Transfer (GST) Tax have nothing to do with income tax. The recipient of a gift or inherited property does not owe income tax on the gift or inheritance. Gift taxes, if any, are the primary responsibility of the donor. Those taxes are totally separate and apart from income tax. One income tax-related point, however, is that the recipient of property which has appreciated in value since acquired by the donor, takes the donor’s cost basis for income tax purposes, instead of the value of the gifted property on the date of the gift, and if the recipient sells the property at a higher value than the donor’s cost basis, there will be capital gains tax upon the sale. When appreciated property is transferred at death, instead of by lifetime gift, the recipient’s cost basis is stepped-up to the date-of-death value.
The modern estate tax was enacted in 1916. It is a tax on the transfer of assets of substantial value by a deceased person to others. The tax applies to property transferred by will or to transfers at death under state law, such as the North Carolina Intestate Succession Act. It also applies to property transferred by beneficiary designation, such as retirement accounts and life insurance proceeds on policies owned by a decedent, as well as property owned jointly with right of survivorship, payable-on-death or transfer-on-death accounts, etc., at least to the extent to which the decedent contributed to joint accounts, and transfers passing at death under revocable trust agreements.
Proponents of estate taxes consider it to be a progressive, fair source of government funding, and a good way to break up large accumulations of wealth in wealthy families. Winston Churchill once described estate taxes as “a certain corrective against the development of a class of the idle rich.”
Not too long after the adoption of the estate tax laws, people started giving away assets during their lifetimes, often on their deathbeds, to avoid estate tax at death, as a result of which, federal gift tax laws were adopted several years later, covering lifetime gifts.
To encourage some lifetime gifts in limited amounts, the gift tax laws give some “wiggle room” in allowing gifts without gift tax ramifications. Gifts which are currently exempt from gift tax include: gifts from a donor to an individual recipient which do not exceed a total value of $15,000 in a calendar year, gifts to spouses who are US citizens, and gifts for tuition as an educational expense and certain medical expenses. But please note that educational and medical gifts may not be given to an individual who uses the money to pay those expenses. Instead they must be paid directly to the educational institution or medical provider. Medical insurance premiums qualify for the medical exception, if paid directly to the insurer. Tuition and medical gifts are described in more detail under another article.
After the onset of gift taxes, creative tax planners came up with other devices to avoid estate and gift taxes on the transfer of wealth from one generation to another: Gifts could be made directly to grandchildren, for example, instead of to children, which would eventually skip a generation for gift or estate tax purposes. Also, taxable gifts could be made to trusts, instead of individuals. The trusts would have beneficiaries of multiple generations, and would not become part of the taxable estates of one or more generations of beneficiaries to receive benefits from the trusts. The trusts could make distributions to beneficiaries of one generation, without the value of the trust’s assets being subject to estate tax for a beneficiary at the time of his or her death. The trusts could simply “hang out there,” not belonging to any beneficiary for estate tax purposes, for multiple generations, without being subject to estate tax at the death of any beneficiary. Under the terms of the trust agreements, distributions could be made in the trustee’s discretion to beneficiaries from any generation, but without the principal value of the trust ever becoming part of a beneficiary’s taxable estate.
To limit that from being abused, a “generation-skipping” transfer tax was adopted in 1976. There could be perfectly good non-tax reasons for some “generation-skipping” gifts, such as the protection of assets for grandchildren if their parent had financial or other personal problems. Consequently, generation-skipping gifts were not abolished for tax reasons, but they were limited instead.
The generation-skipping transfer tax laws are very complicated and are commonly used only by very wealthy families, so we will not discuss those laws in detail here, but we will focus on gift tax and estate tax laws and their unified tax system. We recommend that anyone who is interested in generation-skipping transfer tax planning should discuss the same with one or more qualified professionals.
Federal Estate Tax
The federal estate tax applies to the transfer of property from US citizens or residents at death. Under the Tax Cuts and Jobs Act effective in 2018, the estate tax exemption is now $11.4 million (in 2019) for single persons, and with effective tax planning, $22.8 million for married couples. That Act is currently scheduled to be effective only through 2025, during which time the exemption will be indexed annually for inflation. Taxes on assets in excess of the exemption are taxed at a 40% rate. However, if a decedent is married, he or she may leave unlimited assets in excess of that value to his or her spouse, either outright, in a “marital trust” or in a “Qualified Domestic Trust” (QDOT) for non-citizen spouses, free of estate taxes at the first spouse’s death, but which will later be taxable as part of the surviving spouse’s estate. For a marital trust or a QDOT to qualify for the estate tax marital deduction, certain rules must be followed. We have a separate article discussing QDOT trusts for noncitizen spouses.
The tax basis (for capital gains tax purposes) is stepped up to the date-of-death value, which means that any unrealized capital gains on that date are never subject to capital gains tax. Journalist Michael Kinsley called this the “angel of death loophole.”
The estates of both US citizens and US residents are subject to estate tax.
Please be aware that different rules apply to estate taxes where one spouse is a non-citizen of the United States, even if the non-citizen spouse has been a resident of the United States for many years. Transfers to a non-citizen spouse do not qualify for the estate tax marital deduction unless they are left to a QDOT trust, and a certain election is made on a timely-filed estate tax return. But if the spouse becomes a US citizen before the filing deadline for the estate tax return, those transfers would qualify for the deduction without a QDOT.
Also be aware that estates of non-citizens who are nonresidents of the United States (“nonresident aliens”) and who own certain assets located in the United States, are required to file estate tax returns (on Forms 706-NA) for those “US-situated” assets, if those assets exceed $60,000 in value. That is, the applicable exemption for nonresident aliens on those assets is only $60,000, in stark contrast with an exemption of $11.4 million in 2019 for US citizens or residents.
Federal Gift Tax
Congress enacted the federal gift tax to prevent US citizens and residents from avoiding estate tax by transferring their wealth before they die.
The federal gift tax laws currently allow an amount each year that may be disregarded for both gift (and later estate) tax purposes, called the “annual exclusion.” The current exclusion in 2019 is $15,000 per year for total gifts to a recipient made during the year, applicable to “present interest” gifts. That is, a gift which is to take effect in the future, instead of immediately, does not qualify for the annual exclusion. The annual exclusion is granted to a donor separately for each recipient. A married couple would each have annual exclusions, so the couple could collectively give $30,000 in 2019 to a recipient, and the collective gifts could be made either from their separate assets or from the assets of both spouses, to each recipient.
The gift tax laws also provide a lifetime exemption for taxable gifts made by US citizens and residents (currently $11.4 million per donor in 2019), which is the same amount as the federal estate tax exemption, and the gift tax laws and the estate tax laws are integrated into one “unified” system, i.e. – taxable lifetime gifts reduce the exemption amount available at death on the federal estate tax return, and any taxes actually paid on lifetime gifts are credited toward the federal estate tax at death.
Gifts to spouses who are US citizens are not taxable, and there is no limit to the amount which can qualify for the gift tax marital exclusion. However, the unlimited marital exclusion does not apply for non-citizen spouses, even if they have been residents for many years. Gifts from a US citizen or resident to a non-citizen spouse are exempt up to $154,000 per year in 2019, indexed for inflation.
Another rule applicable to noncitizen spouses: If a US citizen or US resident spouse deposits money into an account in joint names with a spouse who is a US citizen, there is no gift unless the other spouse withdraws money from the account; that is, if the spouse who transferred the money into the account dies, the entire balance transferred by the decedent is treated as part of the taxable estate of the deceased spouse. However, if the account is a joint account with a noncitizen spouse with right of survivorship, then the account is generally treated as owned one-half by each spouse, meaning that a taxable gift has occurred on the creation of the account, except to the extent that money was contributed by the noncitizen spouse, and would be treated as a taxable gift, to the extent that it exceeds the annual gift tax exclusion (of $154,000 in 2019, indexed for inflation). There is a narrow exception to that rule, however, if the parties can prove that their intent was that the money was not to be withdrawn by the noncitizen spouse except for a special purpose which had not occurred.
Gifts include more than just cash transfers. Gifts of assets other than cash (e.g., stocks and bonds, mutual fund shares, partnership or LLC interests, parcels of real estate, etc.) are taxed at their fair market value on the date of the gift. The payment of rent or similar expenses for an adult recipient would be a taxable gift. If someone lends a large amount of money to someone else, either interest-free or at a very low rate of interest (the US Treasury Department publishes an official rate of interest each month, called the Applicable Federal Rate (AFR); if you charge less than the AFR for loans of totaling more than $10,000 to the borrower, the difference is deemed to be a gift).
Gift Tax Marital Deduction for Same-Sex Marriages
North Carolina denied marriage rights to same-sex couples by statute adopted in 1996. A state constitutional amendment was approved in 2012 which defined marriage between a man and a woman as the only “domestic legal union.” This amendment was approved by North Carolina voters by 61% to 39% vote.
In 1996 a federal law was adopted titled the Defense of Marriage Act (DOMA), Section 3 of which defined marriage as the legal union of one man and one woman.
Since those dates, state and federal court decisions have affected federal gift, estate and GST tax laws as they apply to same-sex marriages.
In 2013 a US Supreme Court decision recognized same-sex marriages for gift, estate and GST tax, provided that those marriages were valid under the laws of the states in which those marriages occurred, and it made no difference whether either spouse was a resident of the state in which the marriage occurred. It also makes no difference whether same-sex marriages are recognized in the state of residence of the married couples.
In Notice 2017-15, the IRS described the procedures which same-sex couples may use to re-calculate the marital exclusion amounts for property transferred to spouses before the US Supreme Court invalidated Section 3 of DOMA in 2013, if the gifts did not qualify for the marital deduction for federal gift, estate or GST tax purposes, solely because of DOMA.
If the applicable limitations period has not expired, a taxpayer may file an amended gift tax return or a supplemental estate tax return, on which he or she may claim a refund for taxes which have been paid, as well as restoration of the taxpayer’s applicable exclusion amount.
After the limitation period has expired, no refund can be claimed, but Notice 2017-15 allows the taxpayer to recalculate his or her applicable exclusion amount as a result of recognizing the marriage, and may recalculate the taxpayer’s remaining applicable exclusion amount as directed by the IRS in its forms and instructions.
Many of the issues have been resolved in a taxpayer-friendly way.
This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified tax professional.
The North Carolina General Statutes contain very detailed procedures for establishing or contesting the validity of wills. Wills must be “probated,” that is, found by the Probate Court (the Clerk of Superior Court) to be properly executed and valid, before an Executor or other personal representative will be appointed to settle a decedent’s estate.
There are two different procedures for determining the validity of a will, called 1)probate in common form, and 2)probate in solemn form.
Probate in Common Form
Almost all the time, wills are probated in common form, which is a relatively simple and inexpensive procedure in which a will is approved by the Probate Court when the paperwork is correct. The clerk of superior court must notify by mail all devisees whose addresses are known, but no formal hearing is required at that time.
Since those individuals have not been given an opportunity to contest the will, a will which has been probated in common form may be later challenged by persons who have legal standing to do so.
Occasionally a will which has already been probated in common form is superseded by a later dated will. Most jurisdictions permit a later-discovered will to be admitted to probate, even though a previously-probated will has not been set aside. There are no specific procedures in the North Carolina General Statutes dealing with the situation. The clerk of court is vested with exclusive original jurisdiction over wills, but will caveats or probates in solemn form can eventually be determined by a superior court judge. North Carolina case law appears to require the first will to be set aside before the second will can be admitted to probate, since the probate of the second will is considered to be a collateral attack upon the probate of the first will. This presents a conundrum, or a chicken-or-egg problem, concerning how one should proceed.
Since there are no specific procedures in the General Statutes, different counties may vary slightly in dealing with later-dated wills. We suggest filing the second will with the clerk of superior court, who may decline to proceed until a caveat or probate in solemn form of the first will has been concluded. But the upshot is that the first will can be set aside, and the second will can eventually be probated.
When an interested party contests the validity of a probated will, he or she must file a “caveat” with the Clerk of Superior Court. When the caveat proceeding has been filed, the Clerk of Superior Court orders the Executor to suspend the estate administration pending the outcome of the caveat proceeding.
A will caveat generally must be filed at the time of probate or within three years thereafter. If, however, a Caveator is under 18 years of age or is legally incompetent, then a caveat may be filed at any time within three years after that individual has reached 18 years of age, or within three years after his or her disability has been removed.
Caveats may be filed only by persons who are interested in the estate, such as heirs at law or next of kin, or individuals who claim under an earlier or later document which purports to be the will of the Decedent. If an original document purporting to be a will cannot be found, but a copy is available, there is a rebuttable presumption that the will was revoked, but the absence of the original document does not necessarily defeat the standing of those who present a copy of the lost will for probate. A copy of the missing will may be presented to the Court for probate, and evidence must be presented to support a finding that the original will was not revoked by the testator.
The validity of a purported will may be challenged for various reasons, but the most common are (a)undue influence, or (b)lack of testamentary capacity. A later-dated instrument purporting to be a will may be a third reason.
Some wills contain provisions intended to discourage will caveats, which provide that anyone that challenges the will, will forfeit any benefits which he or she would receive under the will. These are called “in terrorem clauses” and are intended to scare away any would-be challengers. Those forfeiture provisions may or may not be enforceable: if a court finds that a will caveat was in good faith and with probable cause, the in terrorem clause would likely be deemed to be unenforceable.
Probate in Solemn Form
If a person who files a will for probate wants to settle the issue of the document’s validity up-front, instead of having to hold his or her breath for three years to see whether the Will will be contested, the procedure for settling the matter sooner, rather than later, is called “Probate in Solemn Form.”
The person applying for probate of a will may file a Petition for Probate in Solemn Form, instead of relying on a Probate in Common Form, the less formal procedure which was discussed above.
Under a Probate in Solemn Form, the Clerk of Court issues a summons to all parties interested in the estate and schedules a hearing at which the petitioner presents the evidence necessary to probate the will (i.e., to certify its validity). This is in contrast to a Probate in Common Form, where there is no hearing at this point.
If any interested party wants to contest the validity of the will, he or she must either (a) file a will caveat before the hearing, or (b) present facts at the hearing (called “devasavit vel non”) pertinent to the validity of the will, after which the Clerk will transfer the matter to Superior Court, to be heard as a caveat proceeding.
If no interested party contests the validity of the will at the hearing before the Clerk, the probate in solemn form becomes binding, and no interested party who was properly served in the proceeding may file a subsequent contest or caveat of the probated will.
If someone has initially initiated a Probate in Common Form, he or she would not be barred from later applying for a Probate in Solemn Form.
Much of the time it is not necessary to go through a full estate administration for a decedent’s estate, due to one or more of the reasons discussed below, particularly if the estate is modest in size.
Estate administration is not needed for the transfer of non-probate assets, such as real property owned jointly with right of survivorship, life insurance or retirement accounts payable to a named beneficiary, bank accounts or securities accounts which are payable on death or transferred on death to a named beneficiary or beneficiaries, etc.
Also, assets titled in the name of a revocable trust will pass under the provisions of the trust agreement and do not go through a full court administration.
There is one exception to the above, which occasionally applies to bank accounts under a signature card which refers to NCGS Section 41-2.1, sometimes on old accounts which were opened years ago, which cannot generally be closed without the appointment of a personal representative for an estate.
Generally, a “small estate” is defined as personal property, less liens and encumbrances, totaling no more than $20,000 in value, except where the surviving spouse is the sole heir or devisee, in which the maximum amount is increased to $30,000. The facts may be established by affidavit.
An administration of small estates may be avoided if the Family Allowances available to the spouse and to minor family dependents equal or do not exceed the personal property in the decedent’s estate.
The Year’s Allowance for a surviving spouse in 2019 is $60,000 and the allowance for minor dependents is $5,000.
Minor dependents must be under 18 years of age to qualify for a Family Allowance.
In certain instances where the surviving spouse is the sole heir or devisee, the estate proceeding may be started as a summary administration.
Summary administration is not allowed if any property passes to the spouse in trust, or if the decedent’s will specifically states that summary administration may not be used.
In a summary administration, the attorney brings a copy of the Order of Summary Administration, for the clerk’s signature and certification, for each asset to be transferred to the spouse.
Please note that the liability for debts of the decedent continues under this procedure. The only way to cut off the claims of creditors is through regular administration with published notice to creditors, etc.
Notice to Creditors
When there is a full administration of a decedent’s estate, the executor or other personal representative is required to publish a notice to creditors weekly for four weeks in a newspaper of general circulation in the county in which the estate is being administered.
When pursuing an alternative to full administration, such notice is not required.
However, when pursuing an alternative, any person otherwise qualified to serve as personal representative may file a petition with the clerk of superior court to be appointed as limited personal representative to provide a notice to creditors without administration in certain circumstances, including:
(i) When a decedent has died testate (i.e., with a will) or intestate (i.e., without a will), leaving no property which is subject to probate and no real property devised to the executor;
(ii) When a decedent’s estate is being administered by collection by affidavit;
(iii) When a decedent’s estate is being administered under the Summary Administration provisions of the General Statutes
(iv) When a decedent’s estate consists only of a motor vehicle that may be transferred by procedure as described above; or
(v) When a decedent has left assets that may be treated as “assets of an estate for limited purposes” as described in NCGS 28A-15-10, such as a joint account with survivorship under NCGS 41-2.1 as described above, applicable occasionally to accounts with old signature cards.
Transfers of Motor Vehicles
If the estate consists of motor vehicles only, or if the estate consists of motor vehicles and other personal property valued at less than the applicable family allowances described above, it may be possible to avoid a full administration of the estate by using the family allowance procedure to transfer other assets to the spouse and children and by using the procedure in NCGS Section 20-77(b) to transfer title to the motor vehicles.
The Division of Motor Vehicles has issued a Form MVR-317, “Affidavit of Authority to Transfer Title, for transferring titles to motor vehicles out of the name of a deceased owner.
This procedure applies where the Clerk has not allotted the vehicle as part of a year’s allowance and (1) the decedent has died without a will and no personal representative has qualified or is expected to qualify, or (2) the decedent has died with a will and with a small estate which, in the opinion of the clerk, does not justify the expense of probate and administration
All of the heirs of the decedent must sign the affidavit before a notary public, and the parent of a minor child may sign on behalf of the child.
The clerk must also sign the affidavit after the heirs have signed.
Sales of Real Property Left to Heirs or Devisees
Unless real estate is willed directly to the decedent’s estate or the personal representative is expressly directed in the will to sell the real estate, title to real estate generally vests in the heirs or devisees the instant that the decedent dies, and it passes outside the administered estate.
However, the interests of the heirs or devisees in the property is subject to divestment if it is necessary for the personal representative of the estate to sell real property which belonged to the decedent on the date of death, to generate cash with which to pay creditors, administration expenses, etc.
In that case, the personal representative of the estate may file a special proceeding before the clerk of superior court for permission to bring the real property into the administered estate and to sell the same.
If granted, the personal representative may bring the property into the estate and sell the property as directed by the clerk of superior court.
Because of the possibility that the personal representative can do this, the title left to the heirs or devisees is subject to a “cloud on title” for two years after the decedent’s death or until the probate estate has been closed.
To enable the heirs or devisees to sell the real property sooner than that, while the estate is being administered, when it appears that it will not be necessary to bring the property into the estate and to sell the property to pay creditors, etc., the executor or other personal representative may join in the execution of a deed of sale by the heirs or devisees, essentially to indicate that the estate has sufficient assets, other than real estate, to satisfy the debts of the estate.
The heirs or devisees cannot sell the real property within two years after the date of death, without the executor’s joinder on the deed.
Unless someone qualifies as executor or administrator of the decedent’s estate, nobody would be authorized to sign the deed, so it would be necessary for someone to qualify as personal representative of the estate, it the heirs or devisees wanted to sell the property within two years after the date of death.
To protect himself or herself against possible personal liability for releasing the property as an asset with which to pay creditors, if necessary, the executor or other personal representative may insist on holding the proceeds of sale in escrow temporarily, until the estate has been closed or until two years has passed after the date of death.
North Carolina authorizes Health Care Powers of Attorney to be executed, authorizing someone to make medical decisions for you, if you become unable to make or communicate your own medical decisions.
We recommend that everyone have a Health Care Power of Attorney, which frequently designates a primary agent and also back-up agents, in case the primary agent cannot be reached or cannot make a decision for you.
The official form of Health Care Power of Attorney, as set out in the North Carolina General Statutes, is very thorough and comprehensive. It also contains some blank spaces, in which you may add to, limit or explain your Health Care Agent’s powers in further detail if you wish to do so.
That is, the official form may be modified to express your personal wishes, such as religious beliefs, whether or not you want to be an organ donor, or to express your funeral and burial wishes, or your desire to be cremated, if applicable.
A Health Care Power of Attorney must be signed in the presence of two witnesses and must be notarized.
The witnesses may not be your natural heirs (such as your spouse or children, or even siblings, aunts, uncles or first cousins) or people who are beneficiaries under your Will, or employees of your doctor or a hospital or other health facility, such as a retirement or a nursing home, where you are a resident.
Advance Directive, or Living Will
Another document which you may want to have is an Advance Directive or “Living Will,” which expresses your desire not to have the dying process prolonged if you are, in the opinion of your doctor, terminally ill and likely to die soon, or if you have completely lost your mental capacity, or are unconscious and unlikely to regain consciousness.
A Living Will can empower your doctor to make a decision not to put you on life support without input from your family, but if you want family or friends to be included in that decision, you can also require the doctor to get permission from your Health Care Agent.
A Living Will does not give anyone permission to cause you to die sooner than you would have died by natural causes, even if you are in great pain and want your life to be terminated.
A living will simply permits your health providers to allow you to die of natural causes, without putting you on life support to prolong the dying process, when you are terminally and incurably ill and likely to die in the near future, as determined by your attending physician.
A Living Will must be signed in the presence of two witnesses and must be notarized.
The witnesses may not be your natural heirs (such as your spouse or children, or even siblings, aunts, uncles or first cousins) or people who are beneficiaries under your Will, or employees of your doctor or a hospital or other health facility, such as a retirement or a nursing home, where you are a resident.
Combined Health Care Power of Attorney and Living Will
The Health Care Power of Attorney and Living Will may be combined into one document, provided that the combined document complies with all the requirements for both separate documents.
Authorization to Share Confidential Health Care Information
To move on to another legal document, please be aware that the HIPAA laws are intended to protect the health care privacy of patients from people who are not authorized by the patient to have that information.
Usually when a competent patient is admitted to a medical facility, he or she can give permission for the hospital to share his or her medical information with specific individuals. However, in case you are not able to give permission at the time of your admission, it is a good idea for you to have signed an Authorization to Share Confidential Health Information ahead of time, which can be used if necessary, when you are later admitted to a hospital or other health care facility.
Do Not Resuscitate Order (DNR) and Medical Orders for Scope of Treatment (MOST) Forms
In North Carolina a Do Not Resuscitate (DNR) Order is a medical order signed by a physician, which alerts medical personnel that a patient does not want cardiopulmonary resuscitation (CPR) in the event of medical emergency, such as a cardiac or respiratory arrest.
In North Carolina a physician may issue a DNR Order or a Medical Order for Scope of Treatment(MOST) Form, usually printed on brightly-colored paper, which are kept with the patient’s medical records.
The MOST form covers the DNR order, in addition to other end-of-life treatments, it informs medical personnel how to honor the wishes of the patient.
The patient (or his or her authorized health care agent) and attending physician must sign a MOST form.
These forms are prepared by the physician and not by the attorney for the patient.
The form does not replace a Living Will, but translates the patient’s wishes into a medical order, even if the patient is transferred from one medical facility to another.
Euthanasia or Assisted Suicide or Death
Causing someone to die sooner than they would if they died of natural causes is commonly called “Euthanasia,” or “assisted suicide/death,” which would be a crime under North Carolina law.
For about ten years only two states allowed assisted suicide – Oregon and Washington.
In recent years several other states or jurisdictions in the United States now allow assisted suicides – the most recent being New Jersey (effective 08/01/2019) and Maine (effective 01/01/2020) – and legislation has been proposed in many other states.
Even the states which permit assisted deaths recognize that the power to terminate someone’s life might be abused, and there are safeguards in those state laws: most apply only to persons who are residents of those states, and the patient must be found to be likely to die within a relatively short period of time, and to be of sound mind and not clinically depressed when they make the decision to proceed, as determined by medical opinion.
At the current time, no states permit an individual’s decision for Euthanasia or assisted death to be made by someone else, under an advance directive.
To the contrary, the individual must be competent and able to express his or her wishes at the time of his or her request, either verbally or non-verbally, as determined by medical or psychiatric examination.
It is suggested that you get an attorney to assist you in drafting Durable Powers of Attorney, Health Care Powers of Attorney, Advanced Directive (Living Will), and HIPAA Authorization to Release Confidential Health Care Information.
If you die without a Will and you are a resident of North Carolina, the assets owned by you personally on the date of death (i.e., not owned jointly with someone else who has survivorship rights), and not including assets payable to a named beneficiary at your death, will pass under the North Carolina Intestate Succession Act.
(If a person dies with a Will, he or she is said to have died “testate;” without a Will, he or she is said to have died “intestate”)
Many people assume that a married person’s estate will automatically pass to his or her spouse at death, if there is no will.
That can occasionally happen under the right fact situation, but in North Carolina, usually a decedent’s estate will not automatically pass to the surviving spouse.
It is important to know that many assets may be owned in a manner which will automatically pass ownership to a survivor upon someone’s death, instead of passing under the Intestate Succession Act.
This can happen with assets such as bank accounts or other assets owned by two or more persons jointly with right of survivorship, but the proper papers must be signed by the co-owners.
A person may also designate someone else as beneficiary in the event of the owner’s death, of assets such as retirement accounts or life insurance policies, or even bank or brokerage accounts which are owned strictly by one person during his or her lifetime, but payable to a named beneficiary upon the owner’s death.
The owner must sign the beneficiary designation forms for the appointment of beneficiaries to be effective.
Real estate conveyed during their marriage to a husband and wife in both names is usually owned by them “as tenants by the entirety,” a unique form of ownership which passes to the surviving spouse, free of the claims of creditors of the deceased spouse, upon the death of the other spouse.
A very common mistake is made nowadays when a couple acquires real estate in their joint names before their marriage; they may acquire the property as “tenants in common” which means that each of them would own a separate one-half ownership in the property without survivorship, or they may acquire title as “as joint tenants with right of survivorship.”
When they subsequently marry, their ownership is not automatically converted into a tenancy by the entirety, unless the property is re-deeded by both of them to themselves as tenants by the entirety.
Unless there is a new deed, they do not benefit from (1) survivorship, if they own separate one-half interests as tenants in common, or (2) the unique protection against creditor claims which they would have under a tenancy by the entirety.
The best practice would be for the new deed to recite that the purpose of the deed is to convert their ownership into a tenancy by the entirety.
The Intestate Succession Act, when applicable, is complicated, and leaves assets the way that the North Carolina General Assembly has determined – and not the way that you would likely want.
If you want your assets to pass as you intend, it would be better for you to have a will expressing your wishes, to insure that your assets will pass exactly as you want, instead of passing the way someone else has determined .
North Carolina law generally does not allow one spouse to disinherit the other spouse completely, or generally to leave the surviving spouse less that he or she would have received under the Intestate Succession Act.
If a surviving spouse would otherwise receive a smaller share under the will and other survivorship documents than under the Intestate Succession Act, the survivor can apply with the probate court for an elective share.
Please note that the Intestate Succession Act has slightly different inheritance provisions for real property (i.e., land and improvements – commonly called “real estate”) than for personal property (i.e., any property other than real estate – including furniture and household furnishings, motor vehicles, jewelry, tools, equipment and other “things” plus intangible property, such as money, bank and brokerage accounts stock in a corporation or ownership interests in partnerships and LLCs, etc.).
Unless a decedent leaves a Will, the North Carolina Intestate Succession Act determines the shares of heirs and the distribution of the decedent’s estate, as follows:
Decedent survived by spouse and two or more children
Spouse receives first $60,000 of personal property, one-third of personal property in excess of that $60,000, and one-third of real estate.
Children divide two-thirds of the personal property in excess of $60,000, and two-thirds of the real estate, and the shares of minor children are payable to a court-appointed guardian, to be used as approved by the Court until the child is age 18, at which time the assets are transferred into the child’s name, regardless of the maturity level of the child.
Decedent survived by spouse and one child
Spouse receives first $60,000 of personal property, one-half of personal property in excess of $60,000, plus one-half of real estate.
Child receives other one-half of the personal property in excess of $60,000, and one-half of the real estate. The share of a minor child is payable to a court-appointed guardian.
Decedent survived by spouse and no children
If Decedent is survived by one or more parents, Spouse receives first $100,000 of personal property, one-half of personal property in excess of $100,000, and one-half of real estate.
The then-living parent or parents of Decedent receive other one-half of the personal property in excess of $100,000, and one-half of the real estate, in equal shares.
Decedent not survived by spouse, but is survived by one or more children or lineal descendants of deceased children
All personal property and real estate to be divided equally by children, with the share of a minor child payable to a court-appointed guardian.
If any children are deceased and leave then-living children (i.e., Decedent’s grandchildren), the deceased children’s shares are equally divided among the Decedent’s grandchildren by those deceased children, and the share of any minor grandchild is payable to a court-appointed guardian.
Decedent not survived by spouse, children, or lineal descendants of deceased children, but is survived by one or both parents
The parents receive the entire estate, including real estate and personal property, to be divided equally between them if both are living, or all to the survivor, if only one of them is then living.
Decedent not survived by spouse, children or parents
The Decedent’s estate is distributed to the Decedent’s siblings equally and the descendants of deceased siblings.
The share of any minor beneficiary is distributed to a court-supervised guardian until the beneficiary reaches age 18.
Decedent not survived by spouse, children, parents or siblings
One-half the estate is distributed to the Decedent’s maternal grandparents or their descendants and the other one-half is distributed to the Decedent’s paternal grandparents and their descendants
The share of any minor beneficiary is distributed to a court-supervised guardian until the beneficiary reaches age 18.
Please be aware that the estate of a widow or widower under #5, 6 and 7 above will pass 100% to his or her family and nothing will go to the family of his or her spouse, if the spouse predeceased the Decedent.
For children to inherit under the Intestate Succession Act, they must be deemed legally to be children, under the following alternatives:
Legally adopted children are treated the same as biological children;
Stepchildren and foster children who have not been legally adopted are not treated as children;
Biological children who have been adopted by other adoptive parents will not receive a child’s share, with one exception: where children of one spouse are adopted by the other spouse, those children will be considered children of both spouses;
A child conceived before a parent’s death will receive a share if born within 10 months after death;
Illegitimate children born to a deceased father will not receive a share of his estate unless: (i) the child has been legitimated, (ii) the father acknowledged paternity; or (iii) the child was born within one year of the father’s death and paternity has been established through DNA testing.
All of the above can easily result in assets going to the wrong beneficiaries than the Decedent would have wanted. Two examples are as follows:
Unplanned Example A:
Fred and Ann were married for 30+ years and had no children.
Fred’s mother was in her nineties when Fred died without a will.
Under #5 above, Ann received Fred’s personal property up to $100,000 and one half of his personal property in excess of that amount, and she received one-half of Fred’s real estate.
The rest of Fred’s property went to his mother.
When she died a few years later, her estate went to her children, and nothing was left to Fred’s widow, Ann.
Unplanned Example B:
Bob, who is a farmer, was divorced from his first wife, and she deeded the farm property to him in the property settlement.
He remarried and had a wife and two minor children when he unexpectedly died in an accident.
He had a farm loan which had been covered by life insurance.
The property settlement with his former wife allowed her to keep the life insurance, and he did not get any more life insurance for his Widow.
When he died without a Will, his estate passed under #1 above, and the farm equipment went to his Widow, but the farm itself was left one-third to her and two-thirds to his children (in court-supervised guardianships).
His ex-wife collected the life insurance.
His Widow had to deal with the farm and the mortgage, and two-thirds of any farm profits went into the children’s guardianship accounts.
Not what Bob would have wanted.
A surviving spouse can also apply with the probate court to be allotted a spouse’s “Year’s Allowance,” as additional protection for the surviving spouse.
Persons will not inherit under the Intestate Succession Act unless they survive the Decedent by at least 120 hours.
Half relatives are treated the same as whole relatives
Relatives conceived before death will inherit as though actually delivered prior to death, as long as they are delivered within 10 months after the date of death.
Nonresidents and noncitizens are entitled to an intestate share of a Decedent’s estate, see Nonresident and Noncitizen Beneficiaries of Estates and Trusts
“Irrevocable” trusts in North Carolina often may be modified or even terminated under Article 4 of Chapter 36C of the North Carolina General Statutes.
Some terminology used in the article includes:
(a) The trust “Grantor” is the person who creates the Trust;
(b) The “Trustee” is the person or corporate fiduciary who manages the Trust; and
(c) The “Beneficiary” is the person or group of individuals or entities for whom the trust has been created.
Irrevocable Trusts are often used as a means of transferring wealth to loved ones while also reducing estate tax liability for the Grantor’s estate.
The Grantor not only gives the assets away, but he or she also gives up the right to amend or revoke the Trust, even if circumstances change.
If the Grantor reserved the right to make changes to the trust instrument, the gift would be considered incomplete for tax estate and gift tax purposes, which would defeat the principal tax objectives for the gift to the Trust.
Those prohibitions against changing or terminating irrevocable trusts have been softened in recent years by the terms of the Uniform Trust Code, which allow an irrevocable non-charitable trust agreement to be modified or terminated when appropriate, without the loss of the tax benefits, by two procedures: Modification or Termination by Consent and Modification or Termination by the Court.
We will also discuss a third method, called “Decanting,” in which a Trustee may be able to appoint trust assets to a new trust, often created by the Trustee, with more desirable terms and conditions than the old trust.
Modification or Termination by Consent
When the Trust’s Grantor and all the possible beneficiaries of a Trust unanimously agree to modifying or terminating an irrevocable trust with no charitable beneficiaries, the terms of the irrevocable trust instrument may be changed, or the Trust may be terminated, by consent.
This type of modification or termination does not require a court order and can be fairly easy to accomplish, regardless of the proposed changes.
Please note that all the beneficiaries must consent to the changes, and that everyone who might possibly receive trust benefits in the future – even if highly unlikely – is considered to be a beneficiary, and therefore must consent. Otherwise Modification by Consent is not available.
When a Trust is terminated by consent, the trust property is distributed as agreed by the beneficiaries, so it is important that there be a written consent, signed by the beneficiaries, which specifies how the trust assets are to be distributed.
The North Carolina General Statutes provide that a parent may give consent on behalf of his or her minor children, and that a lineal ancestor of an unborn beneficiary may represent the unborn beneficiary in giving consent, and there are other provisions for consent by representatives of missing or other beneficiaries, such as incapacitated ones.
Modification or Termination by the Court
If the Trust’s Grantor is deceased at the time of the proposed modification or termination, or if any beneficiary does not consent to the proposed modification or termination, then an irrevocable trust instrument may still be modified or terminated, but in that case, the irrevocable trust must be modified or terminated by a Superior Court judge, following certain procedures.
A Modification or Termination by the Court is not quite as simple as a Modification or Termination by Consent, but it can be accomplished fairly quickly if all the beneficiaries of the Trust agree.
A Petition must be filed with the Superior Court to allow the requested modification or termination. The Court has a little less latitude in modifying a trust by this method than is allowed for a Modification or Termination by Consent.
In a Modification or Termination by Consent, the Trust’s Grantor may permit a modification or termination, even if the modification or termination is inconsistent with a material purpose for which the original trust was written, but with a Modification or Termination by the Court, the rules are slightly different: A trust may not be terminated by the Court, unless the Court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.
A Modification by the Court, even with the consent of all the beneficiaries, generally may be done only if the Court concludes that the modification is consistent with a material purpose of the Trust.
Even then, there can be a narrow exception, if the Court concludes that the reason for the requested modification “substantially outweighs” the intended material purpose.
Also, if any beneficiaries refuse to consent to a Modification or Termination by the Court, it is still possible to obtain court approval, but in this case, the interests of all non-consenting beneficiaries must be “adequately protected.” Consequently, any non-consenting beneficiary should respond to the Petition and state the reasons for his or her refusal to consent.
In a Modification or Termination by the Court, minor children may be represented by a parent, and unborn beneficiaries may be represented by a lineal ancestor of the unborn beneficiary.
Missing or incapacitated beneficiaries, etc., may be represented by other individuals.
Upon a Termination by the Court, the Trustee shall distribute the trust property as ordered by the Court, in a manner consistent with the purposes of the Trust.
A third alternative, which results in overriding the terms of an irrevocable trust agreement is called “decanting.”
Decanting allows the Trustee of certain irrevocable trusts to “pour over” the assets of the original Trust into a new Trust, with more favorable terms.
Often, Court approval is not required, so decanting can be relatively inexpensive and easy to implement.
Decanting is allowed only if the original trust was created by an irrevocable trust instrument, which gives the Trustee the power to make discretionary distributions of trust assets to or for the benefit of one or more beneficiaries.
Also, the Trustee who exercises the decanting power must not be a beneficiary of the trust.
Decanting may be used to address unforeseen circumstances, such as how to care for a disabled beneficiary, or how to protect a beneficiary with creditor or marital problems.
However, there are limitations as to what the Trustee can do in transferring assets from an existing trust to a new trust: for example, no new beneficiaries may be added, who were not beneficiaries under the old trust instrument.
However, a result somewhat similar to naming a new beneficiary can be achieved in a different manner. Atrust beneficiary may be given a power of appointment in the new trust agreement, which would enable him or her to appoint trust assets to a person who is not named as a beneficiary in the original trust agreement.
For example, an irrevocable trust instrument may provide that trust income, and principal in the trustee’s discretion, may be distributed to the Grantor’s child for life, and after the child’s death, the trust assets are to be distributed to the Grantor’s grandchildren. In this example the child’s spouse would not be a beneficiary of the trust.
If the trust is decanted into a new trust, the spouse still cannot be named as a beneficiary, but the new trust instrument may give the child, who is the life beneficiary of the trust, a power of appointment over the trust assets, whereby the child would be able to appoint the trust assets on his or her death to a person who was not a beneficiary under the original trust instrument.
In that case, the child may choose to appoint the trust assets to his or her spouse, outright and free of trust, or in the alternative, to extend the term of the trust and to make the spouse an income beneficiary, and even to allow the Trustee to make additional distributions to the spouse in the Trustee’s discretion.
Continuing the trust for the spouse’s lifetime would give some protection for the Grantor’s grandchildren, if the spouse remarried, etc.
In any event, irrevocable trusts in North Carolina are generally no longer totally unchangeable.
All three statutory alternatives for changing the original terms of an irrevocable trust agreement which have become inappropriate will require professional assistance, but they can all result in modification of the terms of a trust or termination of a trust which no longer is appropriate.