Drafting Wills and Trusts and Overview of the

Probate ProcessWilliam J. Lindsey, Jr.

Gross & Welch, PC LLO, Omaha

August 12, 2015University of Nebraska College of Law, Lincoln

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TABLE OF CONTENTS

I. ROLE OF THE ATTORNEY ...................................................................................................... 1

II. HOW DID THE 20TH CENTURY AFFECT YOUR CLIENT .................................................. 2

III. TECHNOLOGY, DOES YOUR CLIENT UNDERSTAND WHAT IS EVERYDAY TO YOU? ....... 2

IV. DOES YOUR CLIENT UNDERSTAND WHAT YOU ARE SAYING?.......................................... 3

V. THE MENTALLY COMPETENT PERSON WITH PHYSICAL PROBLEMS ............................... 5

VI. THE SURVIVING SPOUSE ....................................................................................................... 5

VII. CHART TO DETERMINE WHO RECEIVES PROPERTY AT DEATH .................................... 6

VIII. BASICS OF PROBATE .............................................................................................................. 7

IX. DRAFTING WILLS AND TRUSTS .......................................................................................... 12

X. JOINT TENANCY WITH RIGHT OF SURVIVORSHIP ............................................................... 17

XI. TOD (TRANSFER ON DEATH) ACCOUNTS ............................................................................ 26

XII. POD (PAYABLE ON DEATH) ACCOUNTS ............................................................................... 27

XIII. BENEFICIARY DESIGNATION ................................................................................................. 28

XIV. SUCCESSOR OWNER OF LIFE INSURANCE POLICY .............................................................. 29

XV. 529 PLANS .............................................................................................................................. 30

XVI. ELECTIVE SHARE AND STATUTORY ALLOWANCES ............................................................. 31

XVII. ESTATE TAX ........................................................................................................................... 32

XVIII. GIFT TAX ................................................................................................................................ 33

XIX. INCOME TAX ........................................................................................................................... 34

XX. RIGHT OF SETOFF .................................................................................................................. 35

XXI. RENUNCIATION OR DISCLAIMER .......................................................................................... 36

XXII. FEDERAL TAX LIENS .............................................................................................................. 36

XXIII. CREDITORS RIGHTS DURING LIFETIME ............................................................................... 37

XXIV. EFFECT OF DIVORCE ............................................................................................................. 38

XXV. UNIFORM SIMULTANEOUS DEATH ACT ................................................................................ 38

XXVI. POWERS OF ATTORNEY ......................................................................................................... 39

XXVII WHAT IS THE INVENTORY ...................................................................................................... 39

XXVIII OBTAINING THE EMPLOYER IDENTIFICATION NUMBER.................................................... 54

XXIX TAX YEAR FOR AN ESTATE ...................................................................................................... 54

XXX TAX YEAR FOR A TRUST ........................................................................................................... 54

XXXI AUTHORIZATION FOR THIRD PARTY SS-4 ............................................................................. 55

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I. ROLE OF THE ATTORNEY

The role of the attorney varies from case to case. The role of the attorney depends upon who

the client is. The Nebraska Supreme Court has stated that the attorney represents the individual

or other person serving as personal representative of the estate. However, there are other people

that are dependent upon the actions taken by the attorney.

There is an old phrase for a lawyer in which a person acting in the profession was known as

an attorney and a counselor at law. While the practice of law is often adversarial in nature, we

must remember that we often act as legal counselors.

For your elderly clients, you may give advice in areas that you would not originally expect.

For example, in a practice where you have a number of elderly clients, you should expect to

receive calls during the year in which the census is being taken from clients with concerns about

the census. For many clients, filling out the long form census is a daunting task. Another

example would be helping clients fill out their homestead exemption application for their house.

When the loved one has died and you know an estate will be opened, one of the first roles of

the attorney is to facilitate communication among the family members. The old television shows

had a reading of the will. Of course, no such ceremony is legally required, but the concept of a

meeting of the family before commencing the probate process is a good one. This may be your

chance to meet the out-of-town relatives and answer a lot of questions. You will also find there

is a lot of misinformation that needs to be corrected. Among the first questions that you will

often hear are questions involving income taxes. Is my inheritance taxable? There are a number

of different taxes involved in an estate and you must be careful that your client understands

which taxes are being discussed.

The estate process takes time. The time line needs to be explained to the family. There is a

lot of work to be done in gathering information to pay bills and to prepare the inventory. If your

client is working a regular job and acting as personal representative, your client may feel extreme

time pressure. Even so, your client needs to be encouraged to communicate with the other

family members because the lack of communication is very often what results in an estate

escalating into a battle.

As with disputes between neighbors, the best way to avoid a family battle in an estate is to

try to head it off before it occurs. This can often be done in the planning process. When meeting

with mom or dad, take a little time to ask questions about sentimental items such as grandma’s

rocking chair or the heirloom ring. The use of a laundry list is an important element in this area.

Your client should be encouraged to use one. A client should be given a form for the laundry list

because many clients do not know otherwise where to start. However, do not restrict your clients

to a form as that is a negative for many clients.

II. HOW DID THE 20TH CENTURY AFFECT YOUR CLIENT

It is an interesting part of the law practice that when you handle such sensitive matters as

guardianships and estates, that you can learn a lot about people. I have found it fascinating to see

the differences in the generations. There is a difference between those who were adults during

the Great Depression and those who were children during that time. The Korean War veterans

are also different from the WWII veterans.

For example, a person who is an adult when Roosevelt closed the banks during 1933 often

has an extreme distrust of banks and will keep large amounts in demand accounts. The

combination of the depression and of having lost money in 1933 during the bank closing has had

a major effect on the person involved. Quick access is important to them.

There is also a difference one’s concern for your own well being when you have come from

poverty. For many depression-era children, there is a big concern over whether or not they will

have enough funds to care for themselves. Getting depression-era individuals to make gifts is

difficult. It is sometimes difficult for them to comprehend the true extent of their finances. In

some cases, not only can they pay for their full cost of their nursing home care from income, but

they still may owe income tax on the income which is not used for nursing home care.

III. TECHNOLOGY, DOES YOUR CLIENT UNDERSTAND WHAT IS EVERYDAY TO YOU?

The 20th

Century was filled with technology changes. While the telephone was a 19th

Century invention, many other things that we are now using are 20th

Century inventions. World

War II accelerated a lot of development. However, much of the development of the 20th

Century

did not occur until the last quarter of the century.

The original IBM P.C. did not appear until the early 1980’s. The fax machine became

popular in the 1980’s. Laser printers came out in the 1980’s. E-mail became popular in the

1990’s. There has been an Internet explosion in the last decade and a half. Digital photographs

can be sent over the internet.

The use of email and signed pdf documents is a new thing for some of your older clients.

Your 85 year old client may not have been exposed to all of this. That client may have been

retired with only a fax machine in the office. That client may remember photocopy machines as

being a relatively new device. Plain paper copiers would have appeared late in his or her career.

Typewriters, carbon paper and onion skins (a very thin paper used for typing duplicate copies)

were an essential in a large part of their careers.

We must remember that what is commonplace to us, may not be commonplace to your

clients. Part of the reason your client may not understand some of the things you are talking

about is that he or she does not have any direct experience with it. They may not understand

faxing. They may not know what is available on the Internet because they have never “surfed

the net.” They may have a fear of computers.

If you use a mathematical formula clause in your will to calculate how much is to be

distributed the client may not understand it due to never having understood algebra and word

problems.

As an attorney, your job is to communicate your advice to your clients. If your client does

not understand some of the underlying technology that allows you to do what is needed, then you

may need to stop and explain how that works.

For example, in naming a conservator or a trustee, they may be too concerned about the

location of the potential fiduciary. For example, if your client has two children, one in Omaha,

and one in Boston, they would often select the Omaha child to be the conservator solely because

of location. They may not be aware of the ability of the child in Boston to take care of things

because of technology. They need to know about internet access to bank accounts. You need to

make certain that your client is aware of how much smaller the world is because of technology.

Then your client can make an informed decision about the choice of fiduciaries.

IV. DOES YOUR CLIENT UNDERSTAND WHAT YOU ARE SAYING?

If your client has hearing problems, they may have difficulty understanding some of your

tones. If your client’s hearing aid is having problems or the batteries are low, they may miss

some of your words. Depending on your vocal pitch or tone, your client may not understand the

words that you are using because their hearing is impaired for tones in that range. You must

make sure that your client hears you.

As discussed above, technology has made some things dramatically different. Your client

may hear your words but not understand today’s meaning. You need to make sure that you are

conveying the information that you want to convey and that your client understands that

information.

Eyesight can be a problem for many clients. Some may need a magnifying glass to read.

Some do not want to admit hearing or visual problems. I have had a chart in my office showing

different size typefaces in case my client has difficulty reading a smaller type face. Your client

wants to be able to read and understand a document, so why not print out a copy from your laser

printer using a larger typeface. This can either be the draft or the final copy. A will does not

have to be in a 12 point font. If 16 points is better for your client, do it.

Your client’s medical condition can cause problems. If your client is a diabetic, and is near a

time for his or her next meal, then his or her blood sugar may be dropping. This can affect your

client so that, although he or she may hear your words, they do not understand them. A high

blood sugar can also have a similar effect.

People learn naturally in different ways. As an attorney and as a counselor, you must

understand that a big part of your job is to educate your clients. Your client needs to make an

informed decision. The decisions are your client’s to make, but they must have knowledge of the

facts. If they do not understand the situation, the decision they make may not be appropriate.

You may have told your client something, but did your client hear the message you intended to

convey.

Some people learn visually. Drawing diagrams may be the best way to explain to clients.

Spreadsheet programs can produce graphs such a pie charts. These can help people understand

how their estate is being divided.

Due to inflation your clients may have wealth of a larger value, but they are used to with

working smaller numbers. Remember that a person who had difficulty with fractions and

percentages in school may still have difficulty with those. One way to explain a percentage

division is to put a dollar bill and some change on the table that totals a dollar. List the people on

a piece of paper that your client may want to obtain a part of the estate and then tape the change

underneath that person’s name. This can give the person a visual understanding that for every

dollar, 30 cents goes to one person and 10 cents goes to another. I have actually used this

method and then put the paper in the file for later explanation to the client.

Emotions can definitely affect a decision. A major decision should not be made when your

client is at the height of powerful emotions. A number of years ago, I had an incident with a

client who called me up. My client was very mad at one of her children. She wanted to change

her will. The technology available would have allowed me to change the will, possibly even

while I am talking to her on the telephone. Yet is that what your client really wants? Is he or she

just letting off steam? In this particular case, I told my client that I could not get to complete

change to the will until the next day. Late that afternoon I received a telephone call from her

thanking me for not changing the will.

One of the problems in changing the will when your client is in an extreme emotional

situation is that they later will calm down. They may forget that they changed the will and at

death you have a real problem, a will that might not reflect your client’s real desires.

Drugs can have a definite effect on your client’s ability to understand you and to make good

decisions. The affect of the drugs may be something which is inadvertent. For example, your

client may be affected by an interaction between different medications. If you have a client, who

is on a number of prescriptions, you may want to obtain a list of these prescriptions and make

sure that someone with the appropriate expertise can examine the list for interactions. It is

possible that no one doctor or other person knows all of the medications that your client is

taking. You may wish to encourage your client to go to one pharmacy for all medications.

Another emotion that comes into play is embarrassment. If your client is too embarrassed to

ask a question about something, then he or she may not understand and may make a decision

without the appropriate knowledge. Part of your job is to make certain that your client is not too

embarrassed to ask the needed questions.

V. THE MENTALLY COMPETENT PERSON WITH PHYSICAL PROBLEMS

Occasionally you will have a case where your client has suffered a stroke resulting in speech

impairment. This may only be a physical problem which might not affect competence. If your

client has such a problem, remember to include the client in conversations about himself or

herself. The competent client is still the client and respecting his or her dignity becomes even

more essential when speech becomes a problem.

You will need to find ways to communicate with this person. Technology can be very

helpful. If he or she is able to use a computer, then his or her responses can be produced on the

computer screen. A laptop computer would be very helpful for this.

VI. THE SURVIVING SPOUSE

The surviving spouse is often suffering from a large amount of grief. Grief is expressed in a

number of different ways. Sometimes your client is not facing up to his or her grief. This can

result in problems down the line. If you see symptoms of this, you should get your client to the

appropriate counselor.

Grief can produce a client who is more easily overwhelmed. You may not want to give too

much information at one time. This is particularly true for a client who is an inexperienced

spouse. By inexperienced spouse, I mean a spouse who is not used to dealing with the couple’s

financial affairs. That spouse needs more than just raw numbers. He or she may not know what

you mean when you say that basis is stepped up at death because they do not know what the

word “basis” means. They may not understand many things that you consider to be basic. In

many of those cases, you should go with the client to the bank.

A person, who is in shock in the early stages of dealing grief after death, particularly if he or

she is feeling overwhelmed, often forgets information. You need to make sure that he or she has

this information at a time where he or she can process it. Give them some basic explanations in

writing. You need to be willing to explain things more than once. Do not assume that your

client remembers everything from your prior discussions.

It takes time to get over the death of a spouse. Physical assets, particularly those items that

were closest to a spouse such as a jewelry or clothing, often spark the memory.

People operate at different speeds. Just because the next door neighbor finished in three

weeks does not mean that your client has to. Encourage your client to operate at a speed that is

comfortable for them. Your client should not be in a rush to sell the house or to get rid of

personal possessions of the deceased spouse. They may regret this later.

VII. CHART TO DETERMINE WHO RECEIVES PROPERTY AT DEATH

WHO RECEIVES THE PROPERTY AT DEATH At the death of a person we check through the following 4 levels to see who receives. A prior level overrides any

levels below it. Note that the will is at the lowest level.

Level 1: Ownership

Joint Tenancy with Right of Survivorship. At the moment of death the survivor or survivors own the

property. Note special rule for bank accounts with husband, wife and others on them. If two people named

as joint tenants and one has already died, then at the death of the second, it is property of the estate of the

surviving joint tenant (unless there is a POD Beneficiary under Level 3.).

Assets transferred to Trust during lifetime generally are owned by the trust and pass under the terms of the

trust.

A joint tenant or a trust beneficiary receives the property no matter what the will says.

Level 2: Contingent Ownership. Sometimes a contingent owner is named. If the owner dies and the contingent

owner survives, the contingent owner now owns the property.

Section 529 plans (College Savings Plans specially authorized by the IRS. See the Nebraska State

Treasurer’s website for links to more information) usually have a contingent or successor owner. At the

death of the owner of the 529 plan, the ownership passes to the contingent or successor owner.

Life insurance policies may have a contingent or successor owner. If Tom owns a life insurance policy on

Mary’s life and if Alice is the successor owner, then if Mary is still alive, on Tom’s death Alice owns the

life insurance policy.

A trust can be a contingent or successor owner.

The contingent owner receives the property no matter what the will says.

Level 3: Beneficiary Designation. A beneficiary can be named during the lifetime of the decedent who owned the

property. The beneficiary who survives the decedent receives the property. Quite often successor or contingent

beneficiaries are named to take the property if the first beneficiary died before the decedent. The beneficiary

designation overrides the will.

There can be beneficiaries on many different types of assets. These include annuities, life insurance

policies, retirement plans, bank accounts, brokerage accounts, stocks, mutual funds.

A contingent beneficiary is one who receives if the primary beneficiary does not survive.

A POD Beneficiary is used on Bank accounts and means “Payable on Death”.

A TOD Beneficiary is used on stocks and other securities and means “Transfer on Death”.

Nebraska has what is called a Transfer on Death Deed. It became effective January 1, 2013 for deaths

occurring on or after that date.

A trust can be a beneficiary.

The beneficiary receives the property no matter what the will says.

Level 4: Will/Estate/Probate/No Will. We have now reached level 4. The will now controls (although there can be

some exceptions). If there is no will, the law provides who receives. There will usually be a probate for the will.

A will (or a case where there is no will) requires a probate (or administration of the estate through court) to

transfer property.

If there is no will the Nebraska statutes provide for the distribution of the assets. Only if there are no

relatives (and the list of relatives goes quite a long way) does the property escheat or pass to the state.

VIII. BASICS OF PROBATE

The first question to ask yourself when your client comes in after the death of someone is

whether or not a probate is needed. The prior section of this outline is a list shows a four-step

process which can be used in analyzing assets to determine whether or not they are subject to the

Will and to probate. Only when you get to level 4 on the list are the assets subject to the Will

and to probate.

Small estates may not need a probate. When the total value of the probate assets is under

$50,000, you may be able to use a small estate affidavit and avoid a probate. There is also a

special affidavit under federal law available for United States Savings Bonds. Please check the

website for this.

Real Estate has a separate affidavit process and its value is limited to $50,000. When the

word Estate is used in the small estate affidavit, it means the probate estate. Remember that the

word Estate is often defined by the adjectives that modify it.

The Estate is opened by filing either an application for an informal probate or a formal

petition for probate. If there is no Will, there is a similar application or formal petition in

testacy. The original Will must be supplied to the Court if it is not already in the Court’s

possession.

Formal administration is a possibility and informal administration is a possibility. At

least on the opening of the estate, the informal procedure is most often used. You cannot use the

informal procedure if you are appointing somebody as personal representative who does not have

priority. If you have more than one person eligible to become personal representative and they

do not agree, a formal proceeding will be necessary.

Remember that a formal proceeding requires a formal hearing be set up and that notice be

given. There is an inherent time delay involved. If you need someone to act you may need a

special administrator.

Along with the informal application you file an Acceptance of Appointment by the

personal representative. For the person who is nominated in the Will, you check the Will to see

if there is any other person with an equal or greater priority for appointment as personal

representative. If the Estate is intestate you check the statutes to see if there is anybody with

equal or greater priority as personal representative. If there is somebody, they must sign off or

you need to go to the formal proceeding.

Bond may be required. The Will can waive bond or in an intestate administration all of

the heirs can waive bond. If you have a Will, all of the devisees can waive bond.

Once the Will has been admitted to probate, whether it is done formally or informally,

letters of personal representative will be issued by the Court. In some counties the attorneys

prepare these letters and in some (such as Douglas County) the Court does. If there is a bond

required, the bond must be filed with the Court before the letters will be issued. The letters of

personal representative are the proof that the personal representative has been appointed. The

person being named in the Will as a personal representative is not sufficient. Being named in the

Will as a personal representative is the equivalent of a primary election. The Court is the

equivalent of the general election.

Once the probate occurs (by this we mean the Will is admitted to probate, whether

formally or informally) we have certain notice requirements. Notice is required to be given to

heirs (people who would receive if there is no Will), to devisees, to creditors, and under certain

circumstances (all estates where the decedent was at least 55 or had resided in a medical facility)

to the Nebraska Department of Health and Human Services, Medicaid Division, Estate

Recovery. You must file an affidavit of mailing of notice.

Nebraska has a very good probate form system. It is currently probate system V and you

can obtain a license for its use through the Nebraska State Bar Association. You should look at

the checklists and time tables in the system.

The Nebraska probate code should be examined. Nebraska probate code is contained in

Chapter 30 of the Nebraska Statutes.

Within 90 days of appointment, the personal representative must file an inventory with

the court. The inventory has two purposes. It is to let the court know what assets are subject to

probate and it also to let the court know what assets are subject to Nebraska inheritance tax.

The inventory is an itemized listing of the assets of the decedents together with their

values as of the date of death. Although federal estate tax law can allow assets to be valued on

the alternate valuation date, there is no such alternate valuation date for the Nebraska probate

process. You will often need appraisals to determine the value.

Your personal representative will need to account for every single transaction. Make sure

that they have everything set up in order to be able to do so. Quite often, the best approach is to

set up a separate new account for the estate.

Remember that the estate is a new tax payer. You will need to complete Form SS-4, and

if you are applying online, there is an authorization required by the IRS to be signed to allow you

to get that number. Remind your client that they will be receiving a letter from the IRS in 3-4

weeks which is the official assignment of the number. You can obtain the number online.

The estate will have its own income tax return, Form 1041. If this is not something that

you are able to do, please be certain to coordinate with the tax advisor for the personal

representative. The decedent may have one or more other income tax returns to file. It is your

client’s job to get these filed. Your client has personal liability if distributions are made and

federal or state taxes have not been paid.

The inventory is based upon the United States Estate Tax Return. The instructions to the

United States Estate Tax Return, Form 706, will give you a good idea of what appears on each

schedule.

Schedules A, B, C and F are ordinarily probate assets. (Remember that life insurance

paid to the estate rather than to beneficiaries is subject to Nebraska inheritance tax and is a

probate asset. This is usually Schedule D-1.) It is also possible that there will be an annuity that

has a beneficiary that is the estate. This would appear on Schedule I.

It is recommended that the inventory list a summary on the front page. You should also

list the total value of the probate assets and the total value of the non-probate assets. Court costs

in a formal proceeding are based on the probate assets. If you do not separate this out, your

client may pay more in probate costs than is necessary.

Claims may be filed against an estate. If you have notified the creditors within five days

after the notice is published in an appropriate legal newspaper (you do this after the appointment

of the personal representative) then they have sixty days to act. There can be an extension of

time for an additional sixty days. If you do not give notice there is a three year time frame.

Remember that the IRS and the federal government are not necessarily bound by state

time limits. In order to give the IRS notice, you file Form 56 with the IRS. When the estate is

closed out, you file a closing Form 56 with the IRS.

A claim can be filed by either filing a claim in the probate estate or by suing the personal

representative in their capacity as personal representative.

If a probate claim that is filed in the probate court, you will have to determine whether or

not to allow this claim. If you determine to either fully or partially disallow the claim, you need

to send a notice of disallowance. From the service of the notice of disallowance, a petition for

allowance must be filed within sixty days or the claim is barred.

The personal representative has the authority to sell assets unless modified by will or

court order. The primary distribution method is presumed to be an in-kind distribution. You can

make partial distributions, but always make certain that you have quite a bit more than enough to

pay all possible debts and some additional reserves.

The surviving spouse has certain rights. Among these are the elective share and if the

surviving spouse is omitted from the Will, the omitted spouse share. In actions between the

devisees in the Will and the other persons who are beneficiaries of the estate, the personal

representative is a neutral party. For example, on a petition for elective share that has a ruling by

the county court, the personal representative is not a proper party and does not have standing to

appeal the decision.

Distributions can be made and the estate may be closed informally. There is a schedule

of distribution that will be completed that shows all distributions that are made. You need to

itemize everything in a final accounting unless all interested persons have waived final

accounting in writing and that is filed with the court. You will need a receipt from the

beneficiaries. You need to establish a system to make certain that you have received all of the

receipts. People often set these aside. Make sure that you have some follow ups.

The final accounting is filed with the court. It is literally an itemized listing of every

single transaction. This is a method of communicating with the beneficiaries, so please feel free

to add any explanation to this.

If the estate is closed informally, the personal representative still remains the personal

representative for one year and then the appointment is automatically terminated without any

further action. However, if the personal representative was bonded, you will need to pay the

bond premium for that year, and you will then need to obtain a release of the bond at the end of

the one-year mark and have to file the appropriate application with the court to get a court order.

In a case where there is a bond, it may be easier and quicker to do a formal closing.

The estate may be closed formally. This is often used where they may be a question or a

litigious beneficiary. You might as well get it done at this point. Once the court order has been

entered and the receipts and other requirements of the order have been filed with the court, you

then have the court issue a discharge. A discharge terminates the liability of the personal

representative.

You will sometimes have a situation where you believe there may be a Will contest. If

you believe that is the case, one procedure that has been used successfully is to open the estate

informally and then once the appointment has been made and the letters have been issued, file a

formal petition for probate of the Will. The informal probate can be challenged later on. By

filing the formal petition, you then have a limited time period in which the person who may want

to contest the Will must come forward or be barred.

Remember also that part of the process is the determination of inheritance tax.

Inheritance tax is due whether or not there is a probate. If you have any questions about

inheritance tax, the Continuing Legal Education provided by the Nebraska State Bar Association

does have an Inheritance Tax Worksheet available and does have some outlines available

describing inheritance tax.

IX. DRAFTING WILLS AND TRUSTS

The basics for drafting Wills and Trusts first require an understanding of what these

documents do and what they do not do. A Will does not cover everything. Attached to the back

of this outline is a four-step process. Review this list and be prepared to discuss it with your

clients. Only items that get through the first three steps can fall in to level four will be subject to

the probate and will be subject to the Will. This is a cause of great confusion among clients and

beneficiaries of an estate.

You need to discuss the concepts in this four-part list with your client so that they know

that by putting someone’s name on their bank account, they may be overriding their Will with

regard to the bank account.

A Will is not self-activating. A Will is activated through probate. The Will is your

client’s decision. What goes into it and who receives the property is your client’s decision. The

client must have testamentary capacity to do a Will. If you question the client’s capacity, you

may wish to have a medical opinion as to whether or not the client is capable. It is up to you to

tell the physician what that capacity is.

Many Wills have a provision allowing for what is known as a “laundry list”. This is a list

that your client can make either before or after the Will is signed of items of personal property.

There are exclusions from this list. I have attached a sample form that you can use. Your client

will probably want a form or a format for doing the list.

You then determine whether or not there are any specific bequests. Remind your client

that if there are specific bequests, they take priority over the gift of the remainder of the estate.

Sometimes your client will want to leave an amount such as $10,000 to a favorite niece or

nephew or some other person. If that is all that is left in the estate, they get the $10,000 and the

children get cut out. Your client often thinks of their estate based on what’s there today and does

not realize that it is a moving target.

Always have a provision in a Will that says what happens to anything else left in the

estate. It is called a residuary or remainder clause. I have had clients come in and make a Will

and say what happens to everything in their estate. However, five years later they own

something else and it is not mentioned in their Will. If you have a provision in the Will that says

I give the rest of the estate to my children, or whomever else it is to be, it is automatically

covered. A Will that does not have a remainder clause can result in an estate that is partially

intestate.

Part of the estate planning process is to recognize that the selection of persons to act is

very important. The personal representative can be named in the Will. Always name a backup

and always ask the client if they want that person to be bonded. If you say nothing in the Will

about whether or not a bond is required, a bond is required.

Discuss with your client where the Will is going to be stored and who will know where it

is. If it is in a safety deposit box, make sure that somebody besides the client has access to the

box, both on the signature card and to the keys.

In today’s world, we also need to deal with assets that are in digital format on computers.

This area of law is developing, but we may need access to login names, security codes,

passwords and other information.

You can name a guardian and a conservator for a minor child in a Will. Discuss this with

your client and always name a backup for any person named to any fiduciary capacity under your

Will. You can name a guardian for an adult incapacitated child in a Will as well.

In Wills for married couples, we do not do joint and mutual Wills. We do separate Wills.

For the guardian and conservator you want to have some appointment language. You need to

recognize that the surviving spouse may not have made an effective appointment, so your

language needs to reflect that. It should state that it nominates the guardian and conservator if

the person is the surviving spouse but also if the spouse survives and did not make an effective

appointment of the guardian or the conservator.

You also need to discuss powers of attorney and health care powers of attorney with your

client. When they come in to you, they will often discuss the Will, but it is more difficult for

people to discuss their potential incapacity then their death. It is often up to you to bring up the

topic.

A Trust is often used as part of estate planning. As with a Will, if you draft a Trust or a

Will we recommend you know why every single provision is in the document. If you do not

know that, you sometimes end up with missing clauses or clauses that conflict.

A Trust applies to assets held by the Trust. Nebraska has adopted the Uniform Trust

Code. There are Nebraska specific modifications. Nebraska also has the statutory rule against

perpetuity act. This does not appear in Chapter 30, but rather in Chapter 76.

The Trust generally is to be funded. It means assets are transferred to the Trustee to hold

on behalf of the Trust. Under Nebraska law, a Trust is not an entity. It does not have the

authority to sue on its own. It is not an entity that can be sued. If a suit is necessary, it is

brought by or against the Trustee in the Trustee’s capacity as Trustee of that Trust. Title to

assets is held in the name of the Trustee as Trustee of the Trust.

A Trust may be a beneficiary under a Will. If that happens, the Trust receives the

distribution from the personal representative through the probate process. If you are attempting

to use the Trust to avoid a probate, naming the Trust as a beneficiary under the Will does not

accomplish your goal. However, this must be done in virtually all cases. This is commonly

known as a pour over will. It deals with the situations that are unexpected or the client forgot to

transfer the assets into the Trust.

The terms of the Trust set up the rules for the Trustee to operate. There are default

provisions contained in the Uniform Trust Code. Most provisions of the Uniform Trust Code are

default provisions, meaning you can change them. However, look at Section 30-3805 to

determine those provisions that are mandatory.

You will also need to deal with federal tax law. Remember that a Trust is a separate tax

payer for federal income tax purposes, and that it has a maximum rate of about $12,000 of

taxable income. (This amount is adjusted for inflation each year.) In addition, certain income is

subject to the 3.8% Medicare tax under the affordable health care act starting this year once you

get to the top bracket. The top bracket is 39.6% plus the 3.8% tax and plus Nebraska tax of

nearly 7%. Nebraska does use slightly different tax brackets. So, part of planning your Trust is

dealing with the fact that the compressed income tax brackets can result in very high income

taxes.

Distributions from a Trust ordinarily carry income out to the beneficiaries. The Trust

gets a deduction and the beneficiary pays the tax. The beneficiary may have a much lower

income tax rate.

It is very important to provide for successor Trustees and to consider whether there will

be a method for removal of a Trustee if there is a problem. You can set up the guidelines in the

Trust itself.

Old Trusts before January 1, 2005 in Nebraska were presumed irrevocable or were

declared to be revocable. Starting January 1, 2005, Trusts are presumed to be revocable unless

they are declared to be irrevocable. This was a major change with the adoption of the Nebraska

Uniform Trust Code.

Trusts can also be what is known as a spend-thrift trust. If a spend-thrift trust restricts

both voluntary and involuntary transfers, it can be valid. In Nebraska a trust that is self settled

does not avoid the settler’s creditor unless the settler no longer has any rights to the assets.

Remember that the Uniform Fraudulent Transfers Act does apply in Nebraska, and if the transfer

is made at a time where it meets the terms of that act, it can be set aside.

There are states that have what are called domestic asset protection trust statutes.

Federal bankruptcy law provides that if the Trusts were created or assets were transferred less

than ten years before the filing of the bankruptcy, that they do not survive the bankruptcy.

Nebraska does not have a domestic asset protection trust statute.

QUIZ Please answer the following questions true or false.

1. Property held in joint tenancy with right of survivorship passes to the surviving joint tenant free of

estate tax and inheritance tax in all circumstances.

2. A bank account with a surviving POD beneficiary (and no surviving joint owner) is a probate asset.

3. Stock held as joint tenant with right of survivorship with your spouse as the sole other owner receives

a full step up in basis for income tax purposes.

4. There is no step-up in basis on appreciated stocks jointly held solely with the surviving spouse.

5. There is no current effect on the ownership of real estate if the surviving spouse signs and records a

quitclaim deed putting the two children’s names on the deed along with the surviving spouse as joint

tenants with right of survivorship.

6. Property held in joint tenancy between husband and wife is subject to the will of the first spouse to die.

7. A beneficiary designation on an IRA overrides the will’s disposition of the same property.

8. A bank account with two joint owners and a POD beneficiary passes to the surviving owner upon the

death of the first owner.

9. Mom survives Dad and adds Daughter’s name to the title to the house by the use of a quitclaim deed as

a joint tenant. Mom sells the house. Daughter’s husband must sign the deed conveying the house to the

buyer.

10. Mom survives Dad and adds Daughter’s name to the title to the house by the use of a quitclaim deed

as a joint tenant. Daughter files bankruptcy. Daughter’s interest in the house is an asset in the bankruptcy

proceedings.

11. Mom survives Dad and adds Daughter’s name to the title to the house by the use of a quitclaim deed

as a joint tenant. Daughter is sued and a judgment is obtained against Daughter. The house is subject to

execution sale as a result of the judgment (assuming no other property can be found).

12. Mom survives Dad and adds Son’s name to the title to the house by the use of a quitclaim deed as a

joint tenant. Son is divorced. Son’s interest in the house is subject to the child support lien.

13. Mom survives Dad and adds Daughter’s name to the title to the house by the use of a quitclaim deed

as a joint tenant. The house is sold while Mom is alive for a gain of $110,000.00. Mom and Dad lived in

the house for 25 years. The sale is free of income tax.

14. Mom survives Dad and puts Daughter’s name on a transfer on death deed for the house. The house is

sold while Mom is alive for a gain of $110,000.00. Mom and Dad lived in the house for 25 years. The

sale is free of income tax.

X. JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

That fact the property is held in a joint tenancy does not mean that a partnership has been

created. This is true even if the co-owners share profits from the property.1

Property passing by joint tenancy passes by operation of law and is not part of the probate estate.

It is not subject to the will or to the law of intestate succession.2

At common law a joint tenancy with right of survivorship was created only if the four unities

occurred at the same time. These were time, title, possession, and interest.3 The existence of

these four unities were not only required at the creation of the joint tenancy but were required to

continue its existence. Destruction of one of these unities destroyed the joint tenancy, turning it

into a tenancy in common.

There have been some statutory changes in Nebraska. At common law a person owning real

estate could not create a joint tenancy by a conveyance to that party and another as joint tenants.

The four unities did not exist. Unity in time did not exist. This has been statutorily reversed.

The old method of conveying to a straw man and then reconveying to the desired parties is no

longer needed.4 A severance of a joint tenancy at common law could not be accomplished by a

conveyance to oneself as a tenant in common as the four unities were not destroyed. If the deed

expressly shows an intention to effect a severance, it does effect a severance.5

Case law has held that the entry into a contract of sale of the property held in joint tenancy by the

joint tenants effects a severance.6 This is based upon the theory of equitable conversion. If the

entry into the agreement is by less than all of the joint tenants, then case law still applies.

However, this case has been statutorily overruled if all of the joint tenants sign an instrument

relating to the title, unless an intention to effect the severance appears in the instrument.7

1 Neb. Rev. Stat. § 67-410(3)(a). Jewel Tea Co., Inc. v. Eagle Realty Co., 70 F. Supp. 918 (D. Neb.

1947).

2 Neb. Rev. Stat. § 30-2724(b). In Re Walters’ Estate, 212 Neb. 645, 324 N.W.2d 889 (1982).

Smith v. Douglas County, Nebraska, 254 F. 244 (8th Cir. 1918) (construing Nebraska law).

3 Buford v. Dahlke, 158 Neb. 39, 62 N.W.2d 252 (1954). The result in Buford has been statutorily

overruled, see footnote 6.

4 Neb. Rev. Stat. § 76-118(1). See Ogier’s Estate, In re, 175 Neb. 883, 125 N.W.2d 68 (1963).

5 Neb. Rev. Stat. § 76-118(4). This statute overruled the Nebraska Supreme Court decision of

Krause v. Crossley, 202 Neb. 806, 277 N.W.2d 242 (1979).

6 Buford v. Dahlke, 158 Neb. 39, 62 N.W.2d 252 (1954).

7 Neb. Rev. Stat. § 76-2,109 reads:

There shall be no severance of an existing joint tenancy in real estate when all joint tenants

A tenancy in common has only one of the four unities, the unity of possession or of right to possession.8

A. Tenancy by the Entirety

Nebraska does not recognize the tenancy by the entirety form of ownership that was permitted

under the common law.9

B. Right of Survivorship

A tenancy in common can be held with a right of survivorship. Common law provided that a

right of survivorship can be attached to a tenancy in common.10

The words Ajoint tenants and

Ajoint tenants with right of survivorship mean the same thing. A right of survivorship is an

element of a joint tenancy.11

A joint tenancy has certain attributes, among which is the right of survivorship, whether or not

such a right is mentioned in the deed.12

Survivorship is not the only characteristic of a joint

tenancy. If a joint tenancy is created, the right includes the right in the whole property.

execute any instrument with respect to the property held in joint tenancy, unless the intention to

effect a severance expressly appears in the instrument.

See Nebraska Law of Concurrent Ownership, Volkmer, 13 Creighton Law Review 513 (1979).

8 In Re Whiteside’s Estate, 159 Neb. 362, 67 N.W.2d 141 (1954).

9 Kerner v. McDonald, 60 Neb. 663, 84 N.W. 92, 83 Am.St.Rep. 550 (1900).

10 Anson v. Murphy, 149 Neb. 716, 32 N.W.2d 271 (1948). Do not presume that there is no right of

survivorship just because the joint tenancy was not validly created. If the joint tenancy was not

validly created look at this case to see if a survivorship right was intended and was attached to a

tenancy in common.

See Nebraska Law of Concurrent Ownership, Volkmer, 13 Creighton Law Review 513 (1979). In

that article Prof. Volkmer states at page 515 It may well be that Anson is a derelict case in

Nebraska law, and it involves an estate that no lawyer would intelligently set out to create. The

author agrees with Prof. Volkmer.

11 Yunghans v. O’Toole, 199 Neb. 317, 258 N.W.2d 810 (1977). The Court stated that >The

defendant's underlying contention throughout this litigation has been that there should be a

distinction between a grant in "joint tenancy" and a grant in "joint tenancy with right of

survivorship," and that the addition of the words "with right of survivorship" indicates an intention

to make the survivorship right indefeasible. As early as 1913 this court declined to make such a

technical distinction because such a rule would only invite confusion and create havoc with

existing deeds.’

12 Id.

Therefore an inconsistent action of one joint tenant can destroy the joint tenancy.13

After the

destruction of the joint tenancy, only a tenancy in common remains (without a right of

survivorship.) However, the survivorship right in a tenancy in common with a survivorship right

is indestructible except by the voluntary action of all of the tenants in common.14

The real estate

held in tenancy in common with a right of survivorship is subject to the debts of the deceased

tenant in common, while the real estate held in joint tenancy is not subject to the debts of the

deceased joint tenant.15

C. No Presumption of Joint Tenancy

There is no presumption of joint tenancy. Unless it is clearly expressed that there is a joint

tenancy with right of survivorship, a tenancy in common without a right of survivorship is

created.16

Where a will gave to two persons a life estate for their use and benefit for so long as

they live and the remainder in fee is given on the death of both individuals, the life estate is held

as joint tenants with right of survivorship. The surviving life tenant has the entire life interest.17

In other words the one-half fee remainder interest does not pass at the death of the first life tenant

to die.18

D. Real Estate

Real estate may be held in joint tenancy. The ownership interests of the joint tenants are

presumed to be equal unless there is the evidence available to rebut the presumption.19

The

interest of the joint tenant in the real estate starts with the creation of the joint tenancy. There is

a gift of an interest in the real estate upon the creation of the joint tenancy to the extent that the

donee did not contribute to the acquisition of the property.20

13

Id.

14 Id.

15 Id.

16 Maxwell v. Higgins, 38 Neb. 671, 57 N.W. 383 (1894). Bodeman v. Cary, 152 Neb. 506, 47

N.W.2d 797 (1950).

17 Id.

18 Planning Tip. When drafting a life interest involving more than one party, specify the interest at

the death of each party to avoid litigation. Also specify whether the remainder interest is divested

by a death of a remainder beneficiary before all life tenants have died. Sometimes this occurs

when parents issue a deed for the real estate while retaining a life interest. What happens when

one of them dies.

19 Anania v. Anania, 6 Neb. 572, 576 N.W.2d 830 (1998).

20 Where the parties are husband and wife and one spouse furnishes all or a larger part of the

consideration for a conveyance, there is a rebuttable presumption that the placing of title in the

name of one spouse was intended by the other spouse as a gift of the property involved.

Upon the death of one joint tenant, the land passes to the surviving tenant free from the debts of

the deceased joint tenant (which were not secured by lien or judgment or subject to an action

under the Uniform Fraudulent Transfers Act).21

Crops standing on the land, whether matured or

not, pass with the land to the surviving joint tenant and are not an asset of the estate of the

deceased tenant subject to administration.22

E. Personal Property

A joint tenancy may be created in any kind of personal property that may be held in severalty.23

Such a joint tenancy may be created by an oral agreement if it is established by a preponderance

of the evidence the quality of which is clear, satisfactory and convincing.24

During the

lifetime of the owners the tangible personal property held in joint tenancy belongs to each of the

owners. Each of the owners owns the whole and each of the owners has a right to use it. As

with real estate the tangible property is considered owned in proportion to the number of joint

owners. This is a presumption, but it can be successfully challenged.

F. Motor Vehicles

Joint tenancies may be created in motor vehicles.25

The possession of and title to the motor

vehicle determine the ownership of the motor vehicle. An attempted transfer of the motor

vehicle without the title fails. As between the buyer and seller of a motor vehicle, the certificate

of title is prima facie evidence, but is not conclusive proof of ownership.26

The execution of the

certificate of title is the exclusive method of conveying ownership to a motor vehicle, but the

certificate is not in itself conclusive of ownership.27

Hoover v. Haller, 146 Neb. 697, 21 N.W.2d 450, 451 (Neb. 1946).

21 In Re. Estate of Kennedy, 220 Neb. 212, 369 N.W.2d 63 (1979).

22 Id.

23 In Re Ogier’s Estate, In re, 175 Neb. 883, 125 N.W.2d 68 (1963). See also In Re Estate of

Steppuhn, 221 Neb. 329, 377 N.W.2d 83 (1985) in which the court actually did find bearer bonds

in joint tenancy. The fact that the funds used to purchase the bonds were withdrawn from a joint

bank account was not sufficient evidence, by itself, to establish joint tenancy in the bearer bonds.

24 Id. Query. Is this a preponderance of the evidence burden of proof or is it really a clear and

convincing standard?

25 Neb. Rev. Stat. § 60-111. A motorboat titled with a certificate of title may also be held in joint

tenancy. Neb. Rev. Stat. §37-1283.

26 Hanson v. General Motors Corp., 241 Neb. 81, 486 N.W.2d 223 (1993).

27 Weiss v. Union Ins. Co., 202 Neb. 469, 276 N.W.2d 88 (1979).

G. Bank Accounts

Joint tenancies may be created in bank accounts. A joint tenancy bank account provides that

there is a current right to withdraw. During the lifetime of all of the joint owners, the funds in

the account belong to the owners based upon their percentage of contributions. If one joint

owner without the consent of the other joint owner withdraws more than he or she is entitled to

withdraw, then the withdrawing joint owner remains liable to the other joint owner. In addition,

the joint tenancy in those funds is not terminated by the withdrawal of the funds. If the

withdrawing joint owner dies, the funds belong as a joint tenant asset to the surviving joint

owner.

We have to remember that a joint tenancy in a bank account is at the ownership level. There is

also the potential of beneficiary designations such as a POD beneficiary. If there is a joint owner

as well as a POD beneficiary, the joint owner succeeds to the account upon the death of the first

owner to die. The POD beneficiary receives nothing. The surviving owner has the right to

change the POD beneficiary. In other words it now becomes a standard POD account when

there is only one owner remaining.

A bank account may be altered by a written notice given by a party.28

The donee of a bank account need not know that the account exists or that his or her name is on

the account.29

The only intention needed to establish the joint account is that of the depositor

who supplied the funds.30

Under current law a bank account can be created with a single owner or multiple owners. In the

statute these are called parties. A multiple party account means an account payable on request to

one or more of two parties, whether or not a rider survivorship is mentioned.31

A multiple party account may be with or without a rider survivorship between the parties. The

parties are those who are current owners and have a right to withdraw from the account. A

beneficiary under a POD (payable on death) designation is not a party, but rather is defined as a

beneficiary. If there are two parties with a rider survivorship and one of the parties dies, the

account belongs to the surviving party. Nothing is paid to the POD beneficiary unless he or she

remains the POD beneficiary on the account when the surviving party dies.

28

Neb. Rev. Stat. § 30-2724. Case law under a prior provision has held that an oral change to an

existing joint account could not be made. Linehan v. First Nat. Bank of Gordon, Nebraska, 7 Neb.

54, 579 N.W.2d 157 (1998).

29 In Re Estate of Lienemann, 222 Neb. 169, 382 N.W.2d 595 (1986).

30 Id.

31 Neb. Rev. Stat. § 30-2716(5).

There is a statutory form that may be used to establish a single or multiple party account.32

While the parties are alive the account belongs to the parties in proportion to their net

contributions to the account.33

The rights under the account may be altered by a written notice given by the party to the

financial institution to change the type of the account or to vary the terms of the account. The

notice must be signed by a party and must be received by the financial institution during that

party’s lifetime.34

A question sometimes comes up to whether the joint tenancy account controls or the will

controls. The statute is clear. The joint tenancy account controls.35

One thing that does come up

that sometimes confuses clients is what happens when husband and wife have both died.

Husband died first and a year later wife died with husband’s name still on the certificate of

deposit. The certificate of deposit is a probate asset of wife’s estate even though it looks like it is

in joint tenancy. It is not in joint tenancy because in order to be in joint tenancy there is an

implicit requirement that the joint tenants still be alive. There are statutory provisions protecting

the financial institution. The financial institution may pay to any party on the account.

H. Stocks & Bonds

Stocks and bonds may be held in joint tenancy.36

Unlike bank accounts, but like real estate a

transfer of an interest in a stock or a bond into joint tenancy is a gift of an interest in that stock on

a present basis. The name of the added joint owner may only be removed with his or her

consent. The signature requirements for a transfer of a certificated security where the company

uses a transfer agent requires a medallion signature guarantee.37

It is not the same as being

notarized.

There are also provisions permitting joint tenancy in combination with TOD (transfer on death)

registration for securities. As with the POD form of registration, the TOD beneficiary only takes

if all of the owners are dead. There is a statutory format for this type of registration.38

I. Mutual Funds

32

Neb. Rev. Stat. § 30-2719.

33 Neb. Rev. Stat. § 30-2722.

34 Neb. Rev. Stat. § 30-2724(a).

35 Neb. Rev. Stat. § 30-2724(b).

36 Neb. Rev. Stat. § 30-2735.

37 This can usually be obtained from a brokerage firm or a bank.

38 Neb. Rev. Stat. § 30-2744.

The rules on mutual funds vary. Mutual funds can have situations where one person can

withdraw or two persons are necessary to withdraw. The prospectus should be carefully

examined in determining the rules for the particular mutual funds. You may also want to check

the website of the mutual fund’s fund family to see if they provide for rules dealing with joint

ownership. Mutual funds are also covered by the registration of securities provisions of the

Nebraska Probate Code.39

J. Federal Securities

United States savings bonds are a very common form of joint ownership. These can be held as

POD beneficiaries and as co-owners.40

Savings bonds are issued in registered form and the

registration is conclusive of ownership. No more than two persons may be named on a bond.41

This can either be as co-owners or one owner with a beneficiary.

During the lifetime of the person who put the money into the bonds, they belong to that person.

A levy by the IRS may be made against either co-owner.42

A levy against a co-ownership bond

by any other creditor of one co-owner is limited to that co-owner’s interest in the bond.43

Divorce orders may be recognized if they comply with federal regulations.44

The federal regulations have a simultaneous death provision which splits the ownership of the

bonds equally.45

Unless the small estate provisions of the federal regulations apply, a probate of

each co-owner would be necessary to transfer the bonds after a simultaneous death.

39 Neb. Rev. Stat. §§ 30-2734 to 30-2745.

40 http://www.savingsbonds.gov/sav/sbregistr2.htm#forms

“Co-ownership means there are two people named on the savings bond and that each has equal

ownership rights to it. Their names are connected by the word "or" on the face of their savings

bond. Either may legally redeem the savings bond without the consent or knowledge of the other.

Upon the death of one co-owner, the surviving co-owner becomes the sole owner. In cases of

death of both co-owners, the savings bond becomes property of the estate of the co-owner who

died last. Transactions other than redemption, such as claims for missing savings bonds, must be

signed by both co-owners, if living. Co-owners are responsible for Federal income tax on the

savings bond's interest earnings in the same proportion in which they contributed funds to

purchase the savings bond, or in equal shares if the savings bond was purchased with funds from a

third person.”

41 31 C.F.R. 315.7 for Series E & H bonds and 31 C.F.R. 353.7 for Series EE & HH bonds.

42 31 C.F.R. 315.21(a) for Series E & H bonds and 31 C.F.R. 353.21(a) for Series EE & HH bonds.

43 31 C.F.R. 315.21 for Series E & H bonds and 31 C.F.R. 353.21 for Series EE & HH bonds.

44 31 C.F.R. 315.22 for Series E & H bonds and 31 C.F.R. 353.22 for Series EE & HH bonds.

45 31 C.F.R. 315.70 for Series E & H bonds and 31 C.F.R. 353.70 for Series EE & HH bonds.

Transferable Treasury securities may be registered in two or more names as joint owners with

right of survivorship or without right of survivorship, but no POD beneficiary registration is

permitted.46

K. Severance of Joint Tenancy

A joint tenancy can be severed by any action taken by a joint tenant which destroys one or more

the four necessary unities. A withdrawal from a bank account by one joint tenant severs the joint

tenancy in the withdrawn funds.47

A deed from one joint tenant to that same joint tenant which

expressly states the intention to sever the joint tenancy will sever the joint tenancy.48

The filing of a partition action does not of itself sever a joint tenancy.49

A contract to sell jointly

held real estate signed by all joint tenants does not sever the joint tenancy.50

L. Capacity for the Creation of a Joint Tenancy

A joint tenancy may only be created if the person creating the joint tenancy has the mental

capacity needed to create it. This most often will occur if the joint tenancy is created by gift.

The creation of a joint tenancy by deed must be by a person who, when the deed is executed, has

Athe capacity to understand what he was doing, knew the nature and extent of his property and

what he proposed to do with it, and to decide intelligently whether or not he desired to make the

conveyance.51

AIn order to vacate a deed on the ground of mental incapacity of the grantor it is

necessary to show such a degree of mental weakness as renders the maker of the deed incapable

of understanding and protecting his own interest. 52

A deed may also be challenged for undue

influence. The standards are similar to those involved in a will contest.53

All of the facts

46 31 C.F.R. 306.11, see in particular 306.11(a)(2).

47 Crowell v. Milligan, 157 Neb. 127, 59 N.W.2d 346 (1953) was overruled by Rose v. Hooper, 175

Neb. 645, 122 N.W.2d 753 (1963) and by Ogier’s Estate, In re, 175 Neb. 883, 125 N.W.2d 68

(1963).

48 Neb. Rev. Stat. § 76-118.

49 Stiff v. Stiff, 184 Neb. 432, 168 N.W.2d 273 (1969). The joint tenancy terminates when the

complete partition has been obtained.

50 Neb. Rev. Stat. § 76-2,109. See also dicta in Satellite Development Co. v. Bernt, 229 Neb. 778,

429 N.W.2d 334 on page 339 (Neb. 1988) which cites this statute.

51 Parkening v. Haffke, 153 Neb. 678, 46 N.W.2d 117 (1951).

52 Id.

53 The standards may be the same, but the burden of proof is not. To set aside an inter vivos transfer

of property for undue influence requires clear and convincing evidence. To set aside a will on the

same grounds requires a preponderance of the evidence. Peterson v. Peterson, 230 Neb. 479, 432

N.W.2d 231 (1988). The alteration of a joint bank account was found to be closer to a will than to

necessary to constitute a valid gift may be inferred from subsequent declarations of the donor

which are in nature admissions against his interest.54

Mistake may be grounds for setting aside a

deed, but it must be established by clear, satisfactory and convincing evidence.

M. Delivery

The essential elements of a gift inter vivos are donative intent, delivery and acceptance.55

Once

the donative intent is established, if all is done that could be done under the circumstances to

make delivery, even if constructive or symbolic, the gift will be sustained.56

A transfer of

property owned by one person to that same person and someone else as joint tenants is a gift.

What is the document creating the transfer or the asset itself is held by the donor’s agent?

AWhile delivery may be made by an agent of the donor, delivery to the agent is not enough. The

gift is not complete until there is an actual delivery to the donee or to someone for him, and until

the gift is completed by delivery, the donor may reassert title to the property. Moreover, since the

authority of an agent is revoked by the death of his principal, the death of the donor before the

actual delivery of the property to the donee terminates the authority of the agent to make such

delivery, and works a revocation of the gift."57

N. Fraudulent Transfer

Once a joint tenancy has been created, the incurrence of debt by one of the joint tenants is not an

act which will sever a joint tenancy.58

A joint tenancy operates from the creation of the tenancy.

As a result any debts incurred after the creation (absent an actual intent to defraud future

creditors59

) are not transfers subject to the Uniform Fraudulent Transfer Act.60

There is no

transfer within the meaning of that act at the death of one joint tenant.61

an intervivos transfer and thus subject to the will standards. The standard of review on appeal is

also different. For the lifetime transfer it is de novo on the record and for the will it is that the

findings of the trier in fact are not to be disturbed unless clearly wrong.

54 Id.

55 Crowell v. Milligan, 157 Neb. 127, 59 N.W.2d 346 (1953). This case was overruled on a different

issue. That issue was whether or not funds removed from a joint tenancy bank account lose their

joint tenancy character. This case held that they did and was overruled by Rose v. Hooper, 175

Neb. 645, 122 N.W.2d 753 (1963) and Ogier’s Estate, In re, 175 Neb. 883, 125 N.W.2d 68 (1963)

on that issue. The delivery issue was not overruled by those cases.

56 Id.

57 Id.

58 De Forge v. Patrick, 162 Neb. 568, 76 N.W.2d 733 (1956).

59 See the Uniform Fraudulent Transfers Act, Neb. Rev. Stat. §§ 36-701 et seq., especially § 36-705.

60 Mahlin v. Goc, 249 Neb. 951, 547 N.W.2d 129 (1996).

61 However, see L.B. 428 in the 2003 Legislature which, if passed, would change this result. At the

If the renunciation is made to try to qualify to obtain or retain Medicaid benefits, the

renunciation is treated as a transfer of property that may disqualify the individual making the

renunciation from Medicaid benefits.62

O. Legislative Modification

The Legislature has the authority to abolish joint tenancy.63

The Legislature has modified joint

tenancy law as described above. The legislature has expressly acknowledged and approved joint

tenancy law.64

XI. TOD (TRANSFER ON DEATH) ACCOUNTS

A TOD account may be established in securities and in securities accounts under Nebraska law.65

Nebraska has an act dealing with the rights for this type of beneficiary. Stock brokerage

accounts, mutual funds, stocks, bonds and dividend reinvestment accounts can be held as TOD

accounts if the issuer or brokerage firm consent to this type of account. The statutes that define

TOD accounts also permit them to be called POD accounts.

The TOD account has no effect during lifetime.66

This is an account designation that is totally

revocable by the sole account owner or all of the owners acting together. The TOD beneficiary

only acquires the property if the TOD beneficiary survives the account owner. Upon the death of

the last owner, the beneficiaries then surviving take the ownership of the security. They hold in

tenancy in common until the stock is re-registered.67

For example, Mon and Dad have stock held

in joint tenancy with a TOD registration to their two daughters, Ann and Beth. Mom and Dad

are killed in a car wreck in early 2003. Beth dies three weeks later before the stock has been re-

registered. The stock is part of Beth’s probate estate and if large enough in value could cause a

probate.

If no beneficiary survives the owners, then the estate of the last surviving owner owns the

security. In our example above, if all four were in an automobile and all four were killed as a

result of the accident, but Mom survived a week after the others had died, the security belongs to

time that this article was written, it was scheduled for a hearing on March 6, 2003.

62 Hoesly v. State, Dept. of Social Services, 243 Neb. 304, 498 N.W.2d 571 (1993).

63 De Forge v. Patrick, 162 Neb. 568, 76 N.W.2d 733 (1956).

64 Id.

65 Neb. Rev. Stat. §§ 30-2734 to 30-2745.

66 Neb. Rev. Stat. § 30-2739.

67 Neb. Rev. Stat. § 30-2740.

her estate and is subject to her will.

Beneficiary registration is not mandatory on the registering entity.68

The registering entity is

given protection if it complies with the statutory procedures, but this does not prevent a suit

between the other interested parties.69

Standard abbreviations are provided in the statute to simplify registration.70

The concept of

substituted beneficiaries is included in the statute. These are beneficiaries who take if the named

beneficiary does not survive the owner.

LDPS stands for Lineal Descendants Per Stirpes. This is determined by the law of intestacy of

the beneficiary’s domicile at the owner’s death. SUB BENE stands for Substitute Beneficiary.

A conservator is required to take into account the estate plan of the ward. The estate plan of the

ward can include TOD beneficiaries. If there is a choice between a separate account with no

beneficiary and no joint owner and a TOD account the conservator should, absent other

circumstances, select the other non-TOD account. This selection can be affected by plans left by

the conservator and a person who may have a conservatorship ahead of them can help the

potential conservator or person acting under a power of attorney by setting up an order in which

assets should be used up. In other words, just as there is an abatement order under a will, an

abatement order can be set up for lifetime transfers.

The rules on mutual funds vary. Mutual funds can have situations where one person can

withdraw or two persons are necessary to withdraw. The prospectus should be carefully

examined in determining the rules for the particular mutual funds. You may also want to check

the website of the mutual fund’s fund family to see if they provide for rules dealing with joint

ownership

XII. POD (PAYABLE ON DEATH) ACCOUNTS

As a matter of historical interest POD accounts in Nebraska were originally deemed by the

Nebraska Supreme Court to be invalid testamentary dispositions since the documents were not

signed in the same manner as a will.71

The adoption of the Nebraska Uniform Probate statutorily

reversed this decision.

A POD account is often established in a bank account. It can be established in securities, but

usually TOD is used. There are statutory provisions dealing with this. This account provides for

68

Neb. Rev. Stat. §30-2741.

69 Id.

70 Neb. Rev. Stat. §30-2744.

71 Young v. McCoy, 152 Neb. 138, 40 N.W.2d 540 (Neb. 1950)

who receives the property on the death of all owners. An owner of a bank account has a prior

right to a beneficiary. For example, mom and dad could set up a joint account and name their

daughter as the POD beneficiary. If either mom or dad dies the account remains the property of

the surviving spouse with a POD beneficiary. Only upon the death of the survivor of mom or

dad does daughter receive the account.

United States savings bonds are a very common form of joint ownership. These can be held as

POD beneficiaries and as joint owners. During the lifetime of the person who put the money into

the bonds, they belong to that person.

The POD account has no effect during lifetime. This is an account designation that is totally

revocable by the account owner. The POD beneficiary only acquires the property if the POD

beneficiary survives the account owner.

A conservator is required to take into account the estate plan of the ward. The estate plan of the

ward can include POD beneficiaries. If there is a choice between a separate account with no

beneficiary and no joint owner and a POD account the conservator should, absent other

circumstances, select the other non-POD account. This selection can be affected by plans left by

the conservator and a person who may have a conservatorship ahead of them can help the

potential conservator or person acting under a power of attorney by setting up an order in which

assets should be used up. In other words, just as there is an abatement order under a will, an

abatement order can be set up for lifetime transfers.

XIII. BENEFICIARY DESIGNATION

A beneficiary designation provides for the person to receive the property on the death of the

account owner. This applies to retirement accounts, IRA’s, life insurance policies, annuities,

401(k) plans, and many other different types of plans. For example, accidental death policies

provide for beneficiary designations.

The beneficiary may be changed by the owner of the policy. The owner of the policy for a life

insurance policy does not have to be the insured. Generally when you are examining an

insurance policy on the life of an individual you will need to know who the insured is, who the

owner is, who the insurance carrier is and who the beneficiary is. During the lifetime of the

insured the owner has the policy rights. Upon the death of the insured the beneficiary becomes

entitled to the policy proceeds.

Life insurance policies can have beneficiary designations that take effect if the beneficiary that

had been previously named dies before the insured. The first beneficiary is usually called the

primary beneficiary and the beneficiary who takes upon his or her death is usually called the

contingent beneficiary. Sometimes there is a third level or a tertiary beneficiary.

Beneficiary designations can be made to trusts (technically to the trustee of the trust) including

life insurance trusts, other living trusts, and testamentary trusts. Careful beneficiary designation

language should be involved.

Retirement plans can have beneficiaries that are not individuals. This can include trusts.

However, you must be very careful on naming a beneficiary on a retirement plan of any type,

because that can affect how the funds are withdrawn and over what period of time. This can

have a major adverse income tax effect. If you name a beneficiary that is a trust on a retirement

plan such as an individual retirement account, you must be certain that you understand the new

rules for distribution of funds on a retirement plan. The minimum distribution rules were

adopted during the year 2002. There are now final regulations. A distribution to a trust if not

properly set up could result in a minimum distribution than is much higher than a distribution

that is to be made to a beneficiary. As a result, estate planners often now write beneficiary

designations that are in effect themselves miniature trusts.

Any beneficiary designation other than POD or TOD is subject to the same rules as POD or TOD

during lifetime. In other words there are no presently existing rights. A person who is a

beneficiary on a life insurance policy has no rights during lifetime. A person who is a

beneficiary on an annuity, retirement plan, IRA, or other investment which has a beneficiary

designation has no rights until the owner of the account dies.

There is one exception to this. Occasionally under a court order or for other reason an

irrevocable beneficiary designation is made. Depending upon the terms of the order or the

contract, the beneficiary designation cannot be changed, but it is theoretically possible that the

policy could be surrendered. The exact language in the order will deal with the potential for

surrender of the policy.

XIV. SUCCESSOR OWNER OF LIFE INSURANCE POLICY

An often overlooked non-probate transfer of a life insurance policy where the owner is not the

insured is the successor owner of a life insurance policy. Husband and wife will often take out

life insurance policies on each other. The life insurance policy if owned by somebody other than

the individual may have a successor owner provision. A successor owner is named by the prior

owner and becomes owner of the policy upon the death of the owner assuming the insured is still

alive. This can be a very powerful technique to be used when moving insurance policies within a

family. For example, husband and wife take insurance policies on each other and upon the death

of one of the spouses the successor owner could be the children. The successor owner has all the

rights of an owner once the owner dies. However, while the owner is alive the successor owner

has no rights unless they are contractually guaranteed and the owner remains able to change the

name of the successor owner.

XV. 529 PLANS

Federal income tax law now allows the use of a Section 529 Plan. These plans are created as a

result of Section 529 of the Internal Revenue Code, which is Title 26 of the United States Code.

Nebraska has a good 529 Plan. This plan provides for the person for whose benefit the plan is

established. This is set up to provide for college or other post-high school education. The right

to withdraw the funds remains in the contributor or other person designated when the account is

established with the 529 Plan. A successor can be named to that individual. The purpose of this

is to permit the contributor to the account or the other holder of that right to withdraw the funds

from the account or to transfer the funds to another beneficiary. Why would this be important?

This is one way that a parent who is concerned about potential for improper use of the funds can

preserve the right to move the funds to someone else or to withdraw the funds. If the funds are

withdrawn for purposes other than education there is a 10% penalty tax on any withdrawn

income. The other important feature is that funds in the account are generally outside the estate

of the person who created the account. In other words you can make a gift with a right to take it

back and still have it outside of your estate unless you have actually exercised the right to take

the funds back.

XVI. ELECTIVE SHARE AND STATUTORY ALLOWANCES

Nebraska law provides for the right of the surviving spouse to take the elective share of the estate

of the deceased spouse. This right applies to the augmented estate. The augmented estate starts

with the probate estate and adds to it certain non-probate transfers.72

The augmented estate

includes TOD and POD transfers as the decedent had the right to revoke these transfers.73

The

augmented estate applies to transfers to any person other than the surviving spouse (other than a

bona-fide purchaser) during the marriage. Joint tenancy assets are included in the augmented

estate.74

Assets of the surviving spouse derived from the decedent are included in the augmented estate.

The augmented estate is a complex calculation and there are a number of issues in the

interpretation of this calculation that have not been decided. Once the petition for the elective

share has been filed and the augmented estate calculated, the court enters an order determining

the contribution to the augmented estate from each recipient of the augmented estate, including

nonprobate transfers.

The augmented estate does not include accident or life insurance proceeds, joint annuity, or

pension payable to any person other than the surviving spouse of the decedent.75

The right to the elective share is personal to the surviving spouse. However, AWhen a surviving

spouse has petitioned for an elective share of a decedent's estate, the right to pursue an elective

share is no longer a surviving spouse's potential personal right subject to abatement, but has

become a right vested in the surviving spouse. Therefore, if a surviving spouse dies after filing a

petition for an elective share pursuant to Neb. Rev. Stat. '''' 30-2315 and 30-2317 (Reissue

72

Neb. Rev. Stat. §30-2314.

73 Neb. Rev. Stat. §30-2314(a)(1)(ii).

74 Neb. Rev. Stat. §30-2314(a)(1)(iii).

75 Neb. Rev. Stat. §30-2314(c)(1).

1989), the proceeding to enforce the spouse's election as a vested right may be revived by the

personal representative of the estate of the spouse who has made the election but who has died

before distribution of property pursuant to the elective share. 76

The petition for elective share

may be revived by the later-deceasing spouse’s personal representative.

The homestead allowance77

, family maintenance allowance78

, and the exempt property

allowance79

may be satisfied from joint tenancy, TOD, and POD bank accounts80

and securities81

to the extent the probate estate is insufficient to satisfy these allowances.

Also, the clear language of §§ 30-2324 and 30-2325 directs that a right to allowances for

homestead, exempt property, and unpaid spousal support survives the claimant's death to the

extent of unpaid support.82

XVII. ESTATE TAX

Property held in joint tenancy is included in the gross estate for federal estate tax purposes of the

first joint tenant to die except the survivors can establish their portion of the consideration for the

acquisition of the property.83

This rule does not apply to property held in joint tenancy with the

surviving spouse. In that case 50% of the property is included in estate of the first spouse to

die.84

If the joint tenancy owners are husband and wife, if the property was acquired in joint tenancy

before 1977, if title has not been changed, and if there are no other co-owners other than the

surviving spouse, the rules that apply to other persons apply to a husband and wife situation.

The marital deduction is likely to apply, so there should be no harm for estate taxes in the

inclusion of the full value of the property in the estate. This may have important income tax

effects. See the income tax section below.

76

Mulligan v. Stephenson, 243 Neb. 890; 503 N.W.2d 540 (1993).

77 Neb. Rev. Stat. §30-2322.

78 Neb. Rev. Stat. §30-2323.

79 Neb. Rev. Stat. §§30-2324 & 30-2325.

80 Neb. Rev. Stat. §30-2726.

81 Neb. Rev. Stat. §30-2343.

82 Mulligan v. Stephenson, 243 Neb. 890; 503 N.W.2d 540 (1993).

83 Internal Revenue Code §2040.

84 Id.

TOD and POD accounts are included in the gross estate of the deceased account owner.85

This

applies whether or not the decedent was the spouse of the beneficiary.

Life insurance policy proceeds on the decedent’s life are included in the estate of the decedent if

the decedent held any incidents of ownership of the policy at death86

, if the decedent had

transferred any interest in the policy within three years before death87

, or if the policy proceeds

are paid to the probate estate.88

Annuities held by the decedent are includible in the gross estate of the decedent.89

This applies

to the extent that the decedent supplied the consideration.

XVIII. GIFT TAX

The effect during lifetime has a direct connection with the gift tax return filing requirements.

Currently the annual exclusion exemption is $11,000.00 per donee from one donor. If property

is transferred that has no current ownership effect such as a joint tenancy bank account, capital

POD beneficiary, TOD beneficiary, or another beneficiary designation, there is no current gift

tax effect. For certain transfers there may be a requirement to file a gift tax return, but there

would be no taxable gift.

For other transfers where there is a current ownership change in the event of the creation of a

joint tenancy, a gift tax return may be required if the contributions do not match the ownership

percentages. For example, if a widow decides to convey title to her house into joint tenancy with

her two children, she has made a gift of two-thirds of the value of the house. She will be

required to file a gift tax return. She will need to report this as a gift. In addition, since a joint

tenancy is included in the estate, an adjustment will need to be made at death. Gift tax may have

been paid during lifetime, but the asset is still included in the estate. The asset will be removed

from the adjusted taxable gifts in computing the estate tax, but due to the time lapse there may be

a change in the value of the asset.

For example, the house may have been worth $150,000.00 when transferred ten years before

death so that there was a gift that was taxable of $50,000.00 less the $11,000.00 exclusion or

$39,000.00 per child for total taxable gifts of $78,000.00. Upon the death of the owner of the

house, assuming no one else has died, there will be a house that is included in the estate. This

house will be included at full fair market value. Let us assume that that is $300,000.00. The

85 Internal Revenue Code §2037.

86 Internal Revenue Code §2042.

87 Internal Revenue Code §2035 & §2042.

88 Internal Revenue Code §2042.. The term used in the code is executor. This has the same meaning

as personal representative in Nebraska.

89 Internal Revenue Code §2039.

entire $300,000.00 is in included in the estate and the previously taxable gift amount of

$78,000.00 is removed from the adjusted taxable gifts.

XIX. INCOME TAX

There is generally not an income tax occurrence on a transfer by gift. Gifts are generally

excluded from income under the Internal Revenue Code. The question arises as to what happens

when property that was held solely, is transferred into joint tenancy and then one of the

individuals involved dies. Property held in joint tenancy between a husband and wife will be

treated as owned one-half by the person who died and one-half by the person who survived,

regardless of contribution.

In other words the basis (cost for income tax purposes) of the house will be determined by taking

50% of the basis of the house in the hands of the surviving spouse immediately before death plus

50% of the fair market value of the property as of the date of death. If the house was purchased

for $100,000.00 and there were $20,000.00 of improvements, the total cost would be

$120,000.00. The house is then worth $180,000.00 at death, 50% of the $120,000.00 would be

$60,000.00 and 50% of the $180,000.00 amount would be $90,000.00 for a total of $150,000.00.

Thus the basis is halfway between what the basis was in the hands before death and the fair

market value as of the date of death.

It is important to recognize that in this example I showed a step up in basis. If the value of the

property has gone down there could easily be a step down in basis. It is also important to

remember that these basis rules do not apply Income in Respect of a Decedent assets such as

annuities and IRA’s.

The basis for joint tenants other than husband and wife is based upon what portion of the

consideration for the property that each party supplied.

If the joint tenancy owners are not husband and wife or if the property was acquired in joint

tenancy before 1977 and the owners are husband and wife and has not been changed and there

are no other co-owners other than the surviving spouse, the rules are that the contribution of the

person who died is considered. For example, if an individual buys a farm and pays it off in 1976

and then gets married later that same year and before the end of 1976 conveys the property under

joint tenancy, then dies in the year 2003, the basis can be determined by using the full fair market

value as of the date of death. There is a series of cases that hold this. When planning for

individuals who have a long-term marriage, particularly if there were assets that were obtained

before marriage, you need to seriously consider whether or not you wish to disturb the joint

tenancy. This is particularly true if the spouse who contributed to the value has a poor health

situation.

Assets that are income in respect of a decedent (IRD) are not subject to the basis rules described

above and upon surrender of the property are subject to income tax. Assets which have income

not includible in the decedent’s income because of the method of accounting are IRD.90

A prime

example is Series E or EE savings bonds. The interest accrued on these bonds is taxable at the

surrender or final maturity of these bonds unless the decedent had elected to pay tax on the

bonds.91

XX. RIGHT OF SETOFF

Remember that the rights of the holders of a bank account are created both by statute and by

contract. If there is debt owed by any account owner, the question arises as to whether the bank

can set off the debt of one account owner against an account to which the contributions were

made by the other account owner. Absent a provision in the contract with the bank, the statute

limits the right of setoff to the net contribution of the debtor-account owner.92

In examining the situation to determine if there is liability, examination of the instrument

creating the debt and any security agreements must be made. Where a mother signed a note as a

co-debtor with her son (with the loan proceeds going to the son) and the note creates a security

interest in any funds that are on deposit with the bank, the bank has a right of setoff.93

This

90 Internal Revenue Code §691.

91 Internal Revenue Code §454. If the decedent had not previously elected to report the bonds on his

or her return, the personal representative may elect to report the income on the final return of the

decedent or on any return of the estate. If reported on the decedent’s final return, the interest has

been reported by the decedent, so it would not be IRD.

92 We hold that, in the absence of an agreement otherwise providing, if a person has a present right to

withdraw funds from a joint account and is indebted to the financial institution where the account

is maintained, the financial institution has a right to set off against such indebtedness the debtor's

beneficial interest in the account as determined by the net contributions rule of ownership in

accordance with §§ 30-2703 and 30-2701(6). Craig v. Hastings State Bank, 221 Neb. 746, 380

N.W.2d 618, 625 (Neb. 1986).

Whatever the limitations §30-2713 may contain with respect to a bank's right of setoff, they are

subject to agreements between a bank and its depositor. Uttecht v. Norwest Bank of Norfolk, N.A.,

221 Neb. 222, 376 N.W.2d 11, 14 (Neb. 1985). ... We conclude that, absent allegations and proof

of fraud, contractual arrangements between a bank and its depositors with respect to the bank's

right of setoff may supersede statutory provisions.

The language used in the deposit agreement in the Uttecht case was:

(c) Subject to rights accorded by law, Bank may, at any time and for any reason, charge to or

offset against any amount then on deposit in any account (including a savings certificate), whether

or not then due, any and all debts or liabilities (sole, several, joint, or joint and several, absolute or

contingent, due or not due, liquidated or unliquidated, secured or unsecured) then owed to Bank

by depositor or, in the case of a multiple-party account, by any party to such multiple-party

account, and this agreement shall be construed to be the consent of depositor and any such party

for the Bank to make such charge or offset if consent be required by any present or future law.

93

It is unfortunate that Kraus did not understand the consequences and ramifications of cosigning for

her son's debt. Kraus v. American Charter Federal Sav. and Loan Ass'n, 240 Neb. 607, 483

N.W.2d 144, 146 (Neb. 1992).

situation occurred not because of the joint ownership, but because the mother co-signed the debt.

XXI. RENUNCIATION OR DISCLAIMER.

A renunciation may be made under the general renunciation statute.94

This applies to a

beneficiary designation and to a surviving joint owner. The renunciation can only apply to that

part of the joint ownership which the decedent held prior to death.

If the renunciation is made to try to qualify to obtain or retain Medicaid benefits, the

renunciation is treated as a transfer of property that may disqualify the individual making the

renunciation from Medicaid benefits.95

If the renunciation is made after a federal tax lien attaches, it is void against the tax lien.96

XXII. FEDERAL TAX LIENS

Federal tax liens may apply to property held in co-ownership or in joint tenancy. A federal tax

lien arises when A... any person liable to pay any tax neglects or refuses to pay the same after

demand. The lien shall be ... Athe amount (including any interest, additional amount, addition to

tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a

lien in favor of the United States upon all property and rights to property, whether real or

personal, belonging to such person. 97

There are statutory provisions for priority determination.98

One of the means of enforcing a federal tax lien is the IRS administrative levy.99

The payment

of an IRS levy discharges the person levied upon for the amount of the levy. Failure to honor a

levy will result in personal liability upon the person levied in the amount of the tax and in

addition a 50% penalty.100

The levy does not finally determine property rights. It has been

94

Neb. Rev. Stat. §30-2352.

95 Hoesly v. State, Dept. of Social Services, 243 Neb. 304, 498 N.W.2d 571 (1993).

96 Drye v. United States, 99-2 USTC &51,006 (1999). Just as exempt status under state law does not

bind the federal collector, ... so federal tax law is not struck blind by a disclaimer.

>But Arkansas law primarily gave Drye a right of considerable value--the right either to inherit or

to channel the inheritance to a close family member (the next lineal descendant). That right simply

cannot be written off as a mere "personal right . . . to accept or reject [a] gift." >

97

26 U.S.C. §6321.

98 26 U.S.C. §6323.

99 26 U.S.C. §6331.

100 26 U.S.C. §6332.

described as a provisional remedy.101

There is an administrative remedy for a wrongful levy.102

A civil action may also be brought for a wrongful levy.103

A joint bank account from which a delinquent taxpayer has a right of withdrawal may be levied

upon regardless of which joint tenant actually contributed the money.104

The other joint tenant

may have a post-levy wrongful levy administrative procedure or civil action.

The federal tax lien on a piece of jointly owned property terminates upon the death of the

taxpayer, unless the state law provides that the survivor takes the property subject to a security

interest, mortgage or statutory lien.

In the absence of a lien, the IRS may not recover the decedent-insured-owner’s tax from the

policy proceeds. Since the insured-owner could not receive the policy proceeds during lifetime,

these proceeds are not subject to the IRS collection efforts unless state law imposes such liability

in favor of other creditors.105

If the lien attaches before death, the cash surrender value is subject

to the lien. Once the lien attaches a transfer of the property does not affect the lien. The policy

proceeds are thus subject to the lien to the extent of the cash value of the policy.106

Although the federal tax lien attaches to the taxpayer’s vested interest under a defined benefit

pension plan, the levy does not reach amounts payable to the beneficiary as death benefits.107

XXIII. CREDITORS RIGHTS DURING LIFETIME

Creditors’ rights track the rights of the individual under Nebraska law. If the property is a bank

account, then the creditors of the spouse who did not contribute the money have no rights.

However, they may not know that. If a bank account is established between a brother and a

sister and the account had all of the funds placed into it by the sister, the creditors of the brother

(after judgment of course) could garnish the account. If the sister does not object to the

garnishment, she may have waived her rights and thus it is essential for the sister to be certain

that she defends her rights.

101

National Bank of Commerce v. United State, 56 AFTR &85B5065 (1985).

102 26 U.S.C. §6343.

103 26 U.S.C. §7426.

104 National Bank of Commerce v. United State, 56 AFTR &85B5065 (1985).

105 United States v. Bess, 357 U.S. 51, 78 S. Ct. 1054, 2 L.Ed.2d 1135 (1958).

106 Id.

107 CCA 200249001.

XXIV. EFFECT OF DIVORCE

If property is held in joint tenancy by a husband and a wife and it is awarded in a final divorce

decree to one spouse, it belongs to that spouse. Evidence of the transfer such as a quitclaim deed

may still be necessary. However, many decrees provide that the decree itself causes the transfer

to occur. Does the divorce decree terminate the survivorship right?

Divorce generally does not affect life insurance. The owner of the policy usually has the right to

change the beneficiary. What happens if the owner fails to change the beneficiary after a

divorce? The beneficiary designation is part of the policy and is not affected unless the terms of

the decree or property settlement waive or terminate the beneficial interest created by the

beneficiary designation.108

The focus is on the language of the dissolution decree. It is possible

to have a result either direction depending upon the language of the decree.

Former wife of deceased was entitled to proceeds of life insurance policy, even though

deceased's son was designated as beneficiary of policy, where property settlement agreement that

was incorporated into decree of dissolution unambiguously provided that husband would

continue existing life insurance coverage on his life, naming wife as beneficiary on policies;

subsequent execution of change of beneficiary form absent consent of wife was therefore

ineffective.109

Plans subject to ERISA are subject to federal law. ERISA's pre-emption section, 29 U. S. C.

§1144(a), states that ERISA "shall supersede any and all State laws insofar as they may now or

hereafter relate to any employee benefit plan" covered by ERISA. A state law relates to an

ERISA plan "if it has a connection with or reference to such a plan.110

If the beneficiary

designation is not properly changed under a plan subject to ERISA, the pre-emption rules apply

and even a state statute like the state of Washington has which provides that divorce revokes

beneficiary designations on life insurance policies is pre-empted so that the divorced spouse

received the proceeds.

XXV. UNIFORM SIMULTANEOUS DEATH ACT

Nebraska has adopted the uniform Simultaneous Death Act.111

Sections 30-121 to 30-128 shall

not apply in the case of wills, living trusts, deeds, or contracts of insurance wherein provision has

been made for distribution of property different from the provisions of sections 30-121 to

30-128.112

108 Pinkard v. Confederation Life Ins. Co., 264 Neb. 312, 647 N.W.2d 85, (Neb. 2002).

109 Metropolitan Life Ins. Co. v. Beaty, 242 Neb. 169, 493 N.W.2d 627 (Neb. 1993).

110 Egelhoff v. Egelhoff, 532 U.S. 141 (2001).

111 Neb. Rev. Stat. §§30-121 to 30-128.

112 Neb. Rev. Stat. §30-126

If two joint tenants die and the evidence is that they died simultaneously, then each receive half

and each is treated as having survived for that one-half.113

If a beneficiary dies simultaneously

with the insured, the beneficiary is treated as having predeceased the insured.114

XXVI. POWERS OF ATTORNEY

Gifts procured by agents from their principals should be scrutinized with close and vigilant

suspicion; in order to avoid fraud and abuse, no gift is permitted by attorney in fact to himself or

herself or third party, absent clear contrary intent on part of principal.115

The establishment of a

joint account or the funding of a joint account by the attorney-in-fact is a gift unless it is

authorized by the principal and the principal was competent at the time of authorization. The

attorney-in-fact and the principal have a fiduciary relationship.

When the creator of the joint account was the principal, the joint tenancy account is valid even

though signed by the attorney-in-fact under a power of attorney.116

When the principal’s wishes

were expressed in writing, an attorney-in-fact acting under a power of attorney may exercise the

principal’s power to remove a joint account owner from an account.

XXVII. WHAT IS THE INVENTORY

The inventory is an itemized list of the assets of the estate along with the fair market

value of the asset determined as of the date of death. Although federal estate tax law allows an

alternate valuation date of six months after the date of death, Nebraska uses the date of death

value only.

Purposes of the Inventory

The inventory has several purposes.

1. List the property subject to the probate or trust administration

113

Neb. Rev. Stat. § 30-122.

114 Neb. Rev. Stat. § 30-124.

115 Fletcher v. Mathew, 233 Neb. 853, 448 N.W.2d 576 (1989).

In this case, plaintiff showed that the defendant held the decedent's power of attorney and that

defendant, using her power of attorney, made a gift to herself. In limited situations dealing with

an attorney in fact, the Fletcher case established that it is sufficient to establish a prima facie case.

Vejraska v. Pumphrey, 241 Neb. 321, 488 N.W.2d 514 (Neb. 1992).

See also, Mischke v. Mischke, 247 Neb. 752, 530 N.W.2d 235 (1995).

116 Peterson v. Peterson, 230 Neb. 479, 432 N.W.2d 231 (1988).

2. List the property subject to inheritance tax

3. List the non-probate property information needed to calculate the elective share

4. List the non-probate property which may be brought back into the estate to satisfy

claims of creditors, homestead allowance, exempt property allowance and family

maintenance allowance117

5. To act as a starting point for the accounting

Value to be shown on the Inventory

The probate code provides the requirement of filing the inventory with the Court. The

statute provides a definition of value for the inventory which is fair market value. Neb. Rev. Stat.

§ 30-2467 states:

Within three months after appointment, a personal representative, who is not a special

administrator or a successor to another representative who has previously discharged this

duty, shall prepare and file an inventory of property owned by the decedent at the time of

death, listing it with reasonable detail and indicating as to each listed item its fair market

value as of the date of the decedent’s death and the type and amount of any

encumbrance that may exist with reference to any item. The personal representative shall

send a copy of the inventory to interested persons who request it and shall file the original

of the inventory with the court.118 (Emphasis added.)

The inheritance tax is imposed upon values determined for Class 1 as the “clear market

value of the property”119, for Class 2 as the “clear market value of the property”120, and for

Class 3 as the “clear market value of the beneficial interests”121, which are received by each

person.

“Clear market value is not defined by statute, though our law is established that clear

market value is measured by the fair market value of the property as of the date of the death of

117

Neb. Rev. Stat. §§ 30-2726, 30-2743 & 30-3850

118 Neb. Rev. Stat. § 30-2467

119

Neb. Rev. Stat. § 77-2004.

120

Neb. Rev. Stat. § 77-2005.

121

Neb. Rev. Stat. § 77-2006. Please note the statutory language for class 3 beneficiaries does have a

different phrase. Instead of the clear market value of the property, we have the tax based upon the clear market value

of the beneficial interests.

the grantor, less the consideration paid for the property.”122 ‘Our law is also established that, for

purposes of taxation, the terms “fair market value” and “actual value” mean exactly the same

thing.123’

“Actual value is the most probable price expressed in terms of money that a property will

bring if exposed for sale in the open market, or in an arm’s length transaction, between a willing

buyer and willing seller, both of whom are knowledgeable concerning all the uses to which the

real property is adapted and for which the real property is capable of being used.124”

An auction or sale price may be the fair market value. “Real property, particularly in

estate proceedings, is routinely sold at auction. Though real estate appraisers may choose to

disregard auction sales for valuation purposes, we have long recognized that the price for which

real estate sells at public auction is admissible as evidence of the value of that property, And

though sale price is not necessarily synonymous with market value, the purchase price of real

property may be taken into consideration in determining the actual value of the property for

taxation purposes.125”

The inventory thus requires fair market value of the assets for both probate purposes and

inheritance tax purposes.126 For inheritance tax purposes the court does have the option of

appointing appraiser or acting as the appraiser itself in determining fair market value.127

On which schedule should Assets be Listed

The Nebraska inventory basically follows the schedules from the United States estate tax

122

In re Estate of Craven, 281 Neb. 122, 794 N.W.2d 406 (2011).

123

Id.

124

Id. (quoting Neb. Rev. Stat. § 77-112).

125

Id.

126

Treas. Reg §20.2031-1 contains the federal estate tax definition of fair market value. “The fair

market value is the price at which the property would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” This

is very similar to the Nebraska definition so federal cases and rules may aid in the determination of fair market

value.

127

Neb. Rev. Stat. §§ 77-2019 through 77-2022.

return, form 706.128 Ordinarily, property is listed on schedules by the type of asset, but this

is subject to three override rules which are listed below. Follow the override rule rather than

the type of property. This greatly simplifies the process of determining probate property and of

allocating the gross estate for the inheritance tax worksheet.

Override Rule No. 1: Form of ownership takes priority over type of property.

Certain forms of ownership take precedence over the type of asset. For example joint

tenancy goes on Schedule E, the joint tenancy schedule and property held in a revocable trust

goes on the Schedule G, Transfers during Lifetime. Assets in an IRA or an annuity go on

Schedule I, the annuity schedule.

If the asset is held inside any of the following devices or is owned by any of the

following means, then follow the rule set out below rather than the normal listing place based

upon type of asset. This allows non-probate property to be listed properly on the inventory.

1. Joint Tenancy. This means that there is at least one surviving joint tenant. If the

decedent was the last surviving joint tenant, it is not joint tenancy property. Report on Schedule

E and list the surviving joint tenants. (See 2013 Form 706, Schedule A).

Example: Farm held in joint tenancy with decedent’s daughter shown on Schedule E not

Schedule A.

2. Annuity. List on Schedule I. This includes all types of annuities and includes retirement

plans such as IRA’s. List with the beneficiaries named for the annuity. If the beneficiary is the

estate it is a probate asset, look at override rule No.3 below. (Note it is not recommended that the

beneficiary be the estate.) (See 2013 Form 706 Instructions for Schedule I.)

Example: Certificate of Deposit held in an IRA is listed on Schedule I, not Schedule C.

Remember that assets held inside an annuity do not receive a step up in basis.

3. Corporation. Assets held inside a corporation are part of the valuation of the corporate

stock. List on Schedule B.

4. LLC. Assets held in an LLC are part of the valuation of the LLC investment. List on

Schedule F. (See instructions on back of 2013 Form 706, Schedule F.)

5. Limited Partnership. Assets held in a Limited Partnership are part of the valuation of the

128

The inventory has a schedule D and D1 and the federal return has only Schedule D. The Nebraska

inventory has only Schedule A and not the special use election on the Form 706.

Limited Partnership investment. List on Schedule F. (See instructions on back of 2013 Form

706, Schedule F.)

6. General Partnership. Assets held in a General Partnership are part of the valuation of the

General Partnership investment. List on Schedule F. (See instructions on back of 2013 Form

706, Schedule F.)

7. Trust. Assets held in a trust are part of the valuation of the trust. List on Schedule G.

(See instructions for 2013 Form 706, Schedule G.)

8. Transfer During Lifetime. Assets transferred during 3 years before death that are subject

to inheritance tax are listed on Schedule G. (See instructions for 2013 Form 706, Schedule G.)

9. TOD or POD Beneficiary Assets. List on Schedule G. Assets which have a TOD

(Transfer on Death) beneficiary or POD (Payable on Death) beneficiary are included in the

federal estate under IRC §2037 and under §2038. See also Neb. Rev. Stat. §77-2002(1)(b) and

(c). (See Instructions for 2013 Form 706, Schedule G.)

10. Successor Owner. List on Schedule G. For example, a 529 plan with a successor owner.

Since this can be changed by the owner if this were includible on the federal return, it would be

under 2038, list on Schedule G. (See Instructions for 2013 Form 706, Schedule G.)

Override Rule No. 2: Beneficiary Designation or Successor Owner being named takes

priority over type of property.

The goal is to have the inventory show probate assets only on Schedules A, B, C, D129,

and F. Examples are given under override rule number 1 above.

Override Rule No. 3: If the estate is the beneficiary, list it on the schedule for that type of

type of property.

Remember that the goal is to have the inventory show probate assets only on Schedules

A, B, C, D, and F. Do not name the estate as a beneficiary. However, if you find a situation in

which this has occurred it has now become a probate asset.

Chart Describing Schedules for Inventory

The schedules described below are those used on an inventory. If there is nothing in this

estate which would be listed on the schedule, that schedule is not attached to the inventory.

129

Life insurance is only shown on Schedule D if it is payable to the estate. There is a separate

Schedule D1 which would need to be used to list other life insurance when there is an elective share involved.

Probate Property is the property which passes according to intestate succession or the

will. If the property is not probate property, it passes to the owner holding the property as a

surviving joint tenant with right of survivorship, to the beneficiary or as provided in a trust.

There is a further explanation below the chart of the four levels which must be examined on an

item by item basis to determine the person or persons receiving the property of the decedent.

This is a general explanation and not every item listed below will be involved in the particular

estate.

Schedule A – Real Estate (Owned by the decedent alone. Jointly held real estate is listed on

Schedule E. Real estate owned by a trust is listed on Schedule G.) This is probate property.

Schedule B – Stocks and Bonds (Owned by the decedent alone. Jointly held stocks and bonds

are listed on Schedule E. Stocks and Bonds owned by a trust listed on Schedule G. Stocks and

Bonds held as TOD (Transfer on Death) are listed on Schedule G.) This is probate property.

Schedule C – Mortgages, Notes and Cash (Owned by the decedent alone. Jointly held accounts

are listed on Schedule E. Accounts owned by a trust listed on Schedule G. Accounts held as

TOD (Transfer on Death) are listed on Schedule G.) This is probate property.

Schedule D – Insurance Payable to Estate (Insurance payable to anyone other than the probate

estate is not listed as it is not subject to inheritance tax.) This is probate property.

Schedule E – Jointly Owned Property. This is not probate property.

Schedule F – Other Miscellaneous Property. This is probate property.

Schedule G – Transfers During Decedent’s Life. This is not probate property.

Schedule H – General Powers of Appointment. This is not probate property.

Schedule I – Annuities. This is not probate property unless the beneficiary of the annuity is

the probate estate, in which case it is listed on Schedule F under Override Rule No. 3.

WHO RECEIVES THE PROPERTY AT DEATH

At the death of a person we check through the following 4 levels to see who receives. A

prior level overrides any levels below it. Note that the will is at the lowest level and only items

which reach level 4 pass under the will. Anything at a prior level passes out to the person or

persons determined at that level. The disciplined use of the rules set out above will ease the

determination of who receives the property at the death and also the determination of whether or

not a probate is needed.

Level 1: Ownership. Who owns the property decides who receives it. Several examples are

given below.

Joint Tenancy with Right of Survivorship. At the moment of death the survivor or

survivors of the joint tenants own the property. Note special rule for bank accounts with

husband, wife and others on them. If two people named as joint tenants and one has

already died, then at the death of the second, it is property of the estate of the surviving

joint tenant (unless there is a POD Beneficiary under Level 3.).

Assets transferred to Trust during lifetime generally are owned by the trust and pass

under the terms of the trust.

A joint tenant or a trust beneficiary receives the property no matter what the will says.

Level 1 assets are usually shown on Schedule E, G and I.

Level 2: Contingent Ownership. Sometimes a contingent owner is named. If the owner dies

and the contingent owner survives, the contingent owner now owns the property.

Section 529 plans (College Savings Plans specially authorized by the IRS. See the

Nebraska State Treasurer’s website for links to more information.) usually have a

contingent or successor owner. At the death of the owner of the 529 plan, the ownership

passes to the contingent or successor owner.

Life insurance policies may have a contingent or successor owner. If Tom owns a life

insurance policy on Mary’s life and if Alice is the successor owner, then if Mary is still

alive, on Tom’s death Alice owns the life insurance policy.

A trust can be a contingent or successor owner.

The contingent owner receives the property no matter what the will says.

Level 2 assets are usually shown on Schedule F.

Level 3: Beneficiary Designation. A beneficiary can be named during the lifetime of the

decedent who owned the property. The beneficiary who survives the decedent receives the

property. Quite often successor or contingent beneficiaries are named to take the property

if the first beneficiary died before the decedent. The beneficiary designation overrides the

will.

There can be beneficiaries on many different types of assets. These include annuities, life

insurance policies, retirement plans, bank accounts, brokerage accounts, stocks, mutual

funds.

A contingent beneficiary is one who receives if the primary beneficiary does not survive.

A POD Beneficiary is used on Bank accounts and means “Payable on Death”.

A TOD Beneficiary is used on stocks and other securities and means “Transfer on

Death”.

Nebraska will have what is called a Transfer on Death Deed. This applies to real estate

located in Nebraska. It becomes effective January 1, 2013 for deaths occurring on or

after that date.

A trust can be a beneficiary.

The beneficiary receives the property no matter what the will says.

Level 3 assets will usually appear on Schedules G and I.

Level 4: Will/Estate/Probate/No Will. We have now reached level 4. The will now controls

(although there can be some exceptions). If there is no will the law provides who receives.

There will usually be a probate for the will.

A will (or a case where there is no will) requires a probate (or administration of the estate

through court) to transfer property.

If there is no will the Nebraska statutes provide for the distribution of the assets. Only if

there are no relatives (and the list of relatives goes quite a long way) does the property

escheat or pass to the state.

With this approach Level 4 assets will appear on Schedule A, B, C, D and F.

Description of Property shown on the Inventory

§30-2467 requires the personal representative to “file an inventory of property owned by

the decedent at the time of death, listing it with reasonable detail.” What is sufficient detail?

Perhaps the easiest way to determine this is to apply the instructions for the United States estate

tax return, form 706.

Real Estate Describe the real estate in enough detail so that it can be easily located

for inspection and valuation. For each parcel of real estate, report the

area and, if the parcel is improved, describe the improvements. For city

or town property, report the street and number, ward, subdivision, block

and lot, etc. For rural property, report the township, range, landmarks,

etc.

For the inventory be certain to list the correct legal description so that

you can file the certificate of County court proceeding involving real

estate. You should look at the deed to determine the legal description as

the abbreviations used by the County assessors can sometimes be

difficult to understand.

Always check to see if there have been some changes such as a

condemnation of a portion of the parcel or the vacation of the street or

alley.

Stocks For stocks, indicate:

Number of shares;

Whether common or preferred;

Issue;

Par value where needed for identification;

Price per share;

Exact name of corporation;

Principal exchange upon which sold, if listed on an exchange; and

Nine-digit CUSIP number

Privately held corporate stock may require more information and may

need to be discussed with the County Attorney to see what information

he or she may require.

Bonds For bonds, indicate:

Quantity and denomination;

Name of obligor;

Date of maturity;

Interest rate;

Interest due date;

Principal exchange, if listed on an exchange; and

Nine-digit CUSIP number.

Private debt may be a note listed on Schedule C

Accrued Interest and

Accrued Dividends

List interest and dividends on each stock or bond on a separate line.

Indicate as a separate item dividends that have not been collected at

death and are payable to the decedent or the estate because the decedent

was a stockholder of record on the date of death. However, if the stock

is being traded on an exchange and is selling ex-dividend on the date of

the decedent’s death, do not include the amount of the dividend as a

separate item. Instead, add it to the ex-dividend quotation in determining

the FMV of the stock on the date of the decedent’s death. Dividends

declared on shares of stock before the death of the decedent but payable

to stockholders of record on a date after the decedent’s death are not

includible in the gross estate for inheritance tax purposes and should not

be listed here.

Schedule C List the items on Schedule C in the following order:

Mortgages;

Promissory notes; (list security if any)

Contracts by decedent to sell land (for example an installment sale);

Cash in possession; and

Cash in banks, savings and loan associations, and other types of

financial organizations. (Describe account type, list balance, list accrued

interest as a separate line item). Do not list full account number under

§6-1664 list only last four digits with placeholders for other digits.

For mortgages, list:

Face value,

Unpaid balance,

Date of mortgage,

Name of maker,

Property mortgaged,

Date of maturity,

Interest rate, and

Interest date.

Schedule E, Jointly

held property

Enter on this schedule all property of whatever kind or character,

whether real estate, personal property, or bank accounts, in which the

decedent held at the time of death an interest either as a joint tenant with

right to survivorship or as a tenant by the entirety.

(Note form of ownership overrides type of property)

Describe the property in the same fashion as you would describe the

property if it had been listed on another schedule.

Schedule F,

Miscellaneous

Property

On Schedule F, list all items that must be included in the gross estate

that are not reported on any other schedule, including:

Debts due the decedent (other than notes and mortgages included on

Schedule C);

Interests in business;

Any interest in an Archer medical savings account (MSA) or health

savings account (HSA), unless such interest passes to the surviving

spouse;

Insurance on the life of another

Claims (including the value of the decedent's interest in a claim for

refund of income taxes or the amount of the refund actually received);

Rights;

Royalties;

Leaseholds;

Judgments;

Reversionary or remainder interests;

Shares in trust funds (attach a copy of the trust instrument);

Household goods and personal effects, including wearing apparel;

Farm products and growing crops;

Livestock;

Farm machinery; and

Automobiles.

Partnerships, unincorporated businesses, LLC’s

TOD & POD

Accounts and assets

Schedule G

(Note form of ownership overrides type of property)

Describe the property in the same fashion as you would describe the

property if it had been listed on another schedule.

Revocable Trust

Assets

Schedule G

(Note form of ownership overrides type of property)

Describe the property in the same fashion as you would describe the

property if it had been listed on another schedule.

Retained Rights in

Lifetime Transfers

made by the Decedent

The following retained interests or rights:

The right to income from the transferred property;

The right to the possession or enjoyment of the property; and

The right, either alone or with any person, to designate the persons who

shall receive the income from, possess, or enjoy, the property.

Schedule G

(Note form of ownership overrides type of property)

Describe the property in the same fashion as you would describe the

property if it had been listed on another schedule.

Schedule I Annuities

IRA

Roth IRA

Pension

Profit Sharing Plan

401(k)

Keogh Plan

SIMPLE Plan

SEP Plan

List The beneficiaries and their shares

Describe the assets inside the item

(Note form of ownership overrides type of property)

Describe the property in the same fashion as you would describe the

property if it had been listed on another schedule.

Always remember the Nebraska Supreme Court rules relating to privacy when listing

assets on the inventory. Do not include any birth dates, Social Security numbers, and financial

account numbers of any person.130

The CUSIP (Committee on Uniform Security Identification Procedure) number is a nine-

digit number that is assigned to all stocks and bonds traded on major exchanges and many

unlisted securities. Usually, the CUSIP number is printed on the face of the stock certificate. If

130

Nebraska Supreme Court Rule § 6-1464. Note that if the account number needs to be disclosed to

use the confidential information form available for a probate in Appendix 8 to the Uniform County Court rules..

http://supremecourt.ne.gov/files/rules/forms/Ch6Art14App8.pdf

you do not have a stock certificate, the CUSIP may be found on the broker’s or custodian’s

statement or by contacting the company’s transfer agent.

Sample Listings based upon assets with override rules being used Assuming Decedent was a Nebraska resident

Bank Accounts Schedule C

Bank Accounts, Jointly Held Schedule E

Bank Accounts, Jointly Held, Estate of Last Named Joint Tenant Schedule C

Bank Account, No Joint Tenant, POD Beneficiary is alive Schedule G

Bank Accounts, Still titled in name of two persons one already dead, Estate of

Last Named Joint Tenant, POD Beneficiary is alive

Schedule G

Bank account owned in an IRA Schedule I

Bank account in a revocable trust Schedule G

Real estate owned solely by decedent Schedule A

Real estate owned by an LLC single member Part of LLC Valuation on

Schedule F

Real estate owned by an LLC more than one member Part of LLC Valuation on

Schedule F

Real estate owned by a corporation Schedule B

Real estate owned by a partnership Part of Partnership Valuation on

Schedule F

Real estate owned in a retirement plan Schedule I

Real estate in a revocable trust Schedule G

Royalties Schedule F

Royalties in a revocable trust Schedule G

Royalties jointly held first joint tenant to die Schedule E

Growing Crops Schedule F

Growing Crops Jointly Owned on Joint Real estate Schedule E

Household goods Schedule F

Stored Crops Schedule F

Stored Crops in an LLC Part of LLC Valuation on

Schedule F

Judgment Schedule F

Livestock Schedule F

Livestock in a trust Schedule G

Livestock in a farm corporation Schedule B

Automobile Schedule F

Automobile with TOD Registration and Beneficiary alive Schedule G

Automobile Jointly Held Joint Tenant Surviving Schedule E

Life insurance payable to the estate Schedule D-1

Life insurance payable to decedent’s child Not Listed, Not subject to

Inheritance Tax

Life insurance in a qualified retirement plan payable to child as the beneficiary Not Listed, Not subject to

Inheritance Tax, §77-2007

Life insurance in a qualified retirement plan payable to estate as the beneficiary Schedule I

Federal tax refund Schedule F

State Tax Refund Schedule F

Real estate in Iowa Not listed, not subject to

Nebraska inheritance tax list on

Iowa Inventory

Real estate in Iowa held in an LLC with ownership interest in a Nebraska

Decedent

Schedule B

Life insurance policy on another person’s life Schedule F

IRA Schedule I

Irrevocable Trust Fund Share not includible under IRC 2035, 2036, 2037 or 2038 Schedule F

Transfer of Real Estate Made within 3 years of death for which a gift tax return is

required

Schedule G

Transfer of Corporate Stock Made within 3 years of death for which a gift tax

return is required

Schedule G

Transfer of Partnership Interest Made within 3 years of death for which a gift tax

return is required

Schedule G

Check Payable to Decedent Schedule F

Casualty Insurance Policy Proceeds Schedule F

Casualty Insurance Policy Proceeds in an LLC Part of LLC Valuation on

Schedule F

Retirement plan subject to exclusion from inheritance tax and which has a

beneficiary other than the estate. (There is theoretically an exclusion for certain

pensions from inheritance tax, but it is extremely rare in practice as the pension

has to have been in pay status as of 12/31/1984 and the beneficiary has not

changed. This is based upon provisions of DEFRA, an income tax Act from the

1980’s which had certain effective date provisions and are not actually codified

in the Internal revenue Code.) Since this was nearly 30 years ago it is rare that

this would actually come up in practice.

Not Subject to inheritance tax

on up to $100,000, §77-2007

(Remember the marital

deduction applies if the

beneficiary is the surviving

spouse)

To Whom is Income in an estate Taxed

Description of Source Estate Other

Savings account solely in decedent’s name without any

beneficiary

X

Dividend on stock solely in decedent’s name without

any beneficiary

X

Dividend on stock solely in decedent’s name with

daughter as sole TOD beneficiary

Daughter

Dividend on stock solely in decedent’s name with

daughter as sole TOD beneficiary, but she pays it over to

the estate and it is split among all of the children

Daughter

IRA payable to the estate X

IRA payable to a beneficiary Beneficiary

Jointly held rental property Surviving Beneficiary

Mom and Dad owned a rental property Dad predeceases,

title never changed, Mom dies

Mom’s Estate

Property held in a trust If Form 8855 is

timely filed

Trust if Form 8855 is not timely

filed

Rental Property in estate specifically devised to one

beneficiary

Estate, but the

income is allocated

to the beneficiary

and if distributed

K-1 issued to

beneficiary

Rental Property with surviving TOD Beneficiary TOD Beneficiary

Life Insurance payable to beneficiary Proceeds usually not taxable post

mortem interest taxable to

beneficiary

Dividend Check payable to decedent only mailed before

death and received after death

Estate

Health Insurance Premium refund for decedent who did

not itemize

Not Taxable

Health Insurance Premium refund for decedent who did

itemize but did not have enough medical expenses to

deduct any of them

Not Taxable

Health Insurance Premium refund for decedent who did

itemize and did have enough medical expenses to deduct

the premium

Taxable to estate to

the extent that the

deduction provided

an income tax

benefit to the

decedent

53

.

XXVIII. OBTAINING THE EMPLOYER IDENTIFICATION NUMBER

The Employer Identification Number (“EIN”) may be obtained online or by completing a

Form SS-4.131 Form SS-4 is completed and signed by an authorized representative of the estate

or the trust. For trusts, EIN issuance is limited to the grantor, owner, or trustor. For estates, EIN

issuance is limited to the decedent (decedent estate) or the debtor (bankruptcy estate). Usually

these are mailed to the Internal Revenue Service. The item that will be returned (within four

weeks) will be Form SS-4 with the EIN appearing in the upper right-hand corner. If a third party

requests the EIN, written authorization must be obtained. 132

If you have an estate, the EIN will need to be used to open the estate’s checking account. Do

not use the decedent’s social security number and do not use the personal representative’s social

security number. Usually a Form SS-4 is completed as part of the initial pleadings in opening

the estate.

XXIX. TAX YEAR FOR AN ESTATE

The tax year for the estate starts with the death of the decedent. The end of the tax year is an

election that can be made by the personal representative. The personal representative can choose

the end of the initial tax year to be at the end of any calendar month which provides for a year

that is not more than 12 months following the date of death of the decedent. For example, if the

decedent died on October 15, 2012, the estate could elect to file a return for the estate ending at

the end of any calendar month beginning with October 31, 2012, and ending with September 30,

2013. The estate could not elect October 31, 2013, as the close of its tax year because the estate

would then have a tax year in excess of 12 months.

There is a major advantage for the estate in electing a fiscal year other than the calendar year.

When assets are distributed from an estate and the income of the estate is distributed with those

assets, the income is reportable on the return of the beneficiary of the estate in the year of the

beneficiary in which the year of the estate ends. In the previous example, if the September 30,

2013, year end is chosen, then any income earned by the estate during its tax year which because

of distribution to the beneficiaries is taxable to the beneficiaries, it is reportable in the

beneficiary’s 2013 return even if the estate earned the income in the year 2012. In addition, if

the estate can be closed in less than one year, you might convert the need to file two returns into

one.

XXX. TAX YEAR FOR A TRUST

With one major exception, all trusts are required to be filed for the calendar year. The major

exception is the revocable trust which was a grantor trust as of the decedent’s death. The

131 To apply online for an EIN, see http://www.irs.gov/Businesses/Small-Businesses-&-Self

Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online.

132

See attached to the end of this outline a Form SS-4 and an example of written authorization.

54

revocable trust may, for its first two years, file a return in combination with the estate or as an

estate if there is no estate. It thus gains the benefit of the estate’s ability to file a fiscal year.133

To do this you must timely file IRS Form 8855.

XXXI. AUTHORIZATION FOR THIRD PARTY SS-4

Authorization to Obtain Employer Identification Number (EIN)

I hereby authorize [NAME OF ATTORNEY]. or any member of the firm of [NAME OF LAW

FIRM] to obtain an Employer Identification Number (EIN), also known as a Taxpayer

Identification Number (TIN) for the following entity:

Entity Name: [Name of Entity]

1. I have been given a copy of the Form SS-4 to review. I have signed the Form SS-4.

2. I authorize a copy of the signed Form SS-4 to be retained in the files of [NAME OF

LAW FIRM].

3. I have read this statement and I have signed this statement.

4. I understand that I am authorizing [NAME OF ATTORNEY] or any member of the firm

of [NAME OF LAW FIRM] to apply for an to receive the EIN on my behalf and on

behalf of the entity described above and answer any questions about the completion of

the form.

5. A copy of this signed Authorization will be retained in the files of [NAME OF LAW

FIRM].

6. I understand that the assigned EIN will be disclosed to [NAME OF LAW FIRM]. upon

the successful completion of the online application.

7. I understand that I will receive a computer generated notice from the IRS stating that the

EIN was assigned.

DATED: ____________, 2015.

[Name of Entity]

By: ______________________________________

[Name of Signer and Title]

133

I.R.C. § 645 (1998).

55

NOTICE OF COMMENT PERIOD

The Forms, Court Rules and Statutes Subcommittee of the Commission on Guardianships and

Conservatorships and the Office of Public Guardian submitted proposed amendments to the Uniform County Court

Rules of Practice and Procedure and four new rules. The proposed amendments would clarify existing guardianship

and conservatorship rules. The new rules would provide for the nomination and appointment of the Office of Public

Guardian; for the appointment of a standby guardian; and for intrastate transfer of guardianship and conservatorship

cases.

The Nebraska Supreme Court invites interested persons to comment on the proposed amendments and new

rules. Anyone desiring to comment on the proposed amendments and new rules should do so in writing to the office

of the Clerk of the Supreme Court and Court of Appeals, P.O. Box 98910, Lincoln, Nebraska 68509-8910, or via e-

mail to jill.machacek@nebraska.gov, no later than August 1, 2015.

The full text of the proposed amendments and new rules follows, or a hard copy may be reviewed in the

office of the Clerk of the Supreme Court and Court of Appeals upon request.

§ 6-1433. Notice of interested person duty; guardian and conservator notice requirements; court notice requirements.

(A) In all probate matters, it shall be the duty of the petitioner or applicant for probate of a will or

appointment of a personal representative, to show in the petition or the application the names, relationship to the

subject of the petition or application, and last known post office address of all interested persons. For purposes of

subsection A of this rule, interested persons shall include all those defined under Neb. Rev. Stat. 30-2209(21) If any

interested person is known by the petitioner, applicant, or the attorney for either to be incompetent or a minor, such

fact shall be disclosed to the court.

(B) In all guardianship and/or conservatorship matters the meaning of interested person may vary from time to time

and must be determined according to the particular purposes of, and matter involved in any proceeding as follows:

1. Prior to appointment and Letters being issued, interested persons are those defined in Neb. Rev. Stat. § 30-

2601(10).

2. After Letters are issued, interested persons are those defined under Neb. Rev. Stat. § 30-2601(10) who have

returned the interested party form to the court, any governmental agency paying benefits on behalf of the ward,

incapacitated person, protected person, or minor and any person designated by order of the court to be an interested

person.

3. Upon termination or transfer of the guardianship and/or conservatorship for any reason other than death of the

ward, incapacitated person, protected person and/or minor, interested persons shall be the same as subsection (B)(2)

above.

4. Upon death of a ward, incapacitated person, protected person and/or minor; interested persons are those defined in

Neb. Rev. Stat. § 30-2209(21).

5. If the Office of Public Guardian is nominated as the guardian and/or conservator, or if a case is accepted to a

waiting list for a guardian and/or conservator as determined by the Office of Public Guardian, the Office of Public

Guardian shall be considered an interested person. If the Office of Public Guardian is nominated but not appointed

due to lack of capacity by the Office of Public Guardian, or the Office of Public Guardian is nominated but not

appointed because the appointment would not comply with the requirements of the Public Guardian Act, the Office

of Public Guardian will no longer be an interested person in the case. If the Office of Public Guardian is an

interested person only because the case has been placed on a Public Guardian waiting list, the Office of Public

Guardian will receive notices, orders and annual reports but the appearance of the Office of Public

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Guardian will not be required at hearings, unless the hearing is to appoint the Office of Public Guardian.

(C) In all guardianship and/or conservatorship matters, it shall be the duty of the petitioner or applicant for a

guardian or conservator to show in the petition or the application, in addition to what is required by Neb. Rev. Stat.

§30-2619 and §30-2633:

1. The names of the interested persons as set forth in the above subsection (B)(1), their addresses if known

and their relationship to the subject of the petition or application;

2. Any other court having jurisdiction over the ward or minor listing the caption of the case, case number

and type of proceeding;

3. If the case involves a minor, if reasonably ascertainable, the minor’s present address or whereabouts, the

places where the minor has lived during the last five years, and the names and present addresses of the persons with

whom the child has lived during that period.

4. Whether the minor is subject to the Indian Child Welfare Act;

5. The number of cases, if any, in which the person or entity being nominated is acting as guardian and/or

conservator for other wards or protected persons at the time of the nomination;

6. Whether the ward has a valid Power of Attorney. If so, the Power of Attorney shall be filed with the

petition as a confidential document if available;

7. Whether the ward has a Health Care Power of Attorney and/or a Declaration relating to use of life-

sustaining treatment (Living Will). If so, the documents shall be filed with the petition as a confidential document, if

available;

8. If any interested person is known by the petitioner, applicant, or the attorney for either to be incompetent

or a minor, such fact shall be disclosed to the court.

9. If the Petition or application nominates the Public Guardian it shall state that due diligence was used to

identify a guardian and/or conservator and the methods employed and that in spite of such efforts the Public

Guardian is the last resort.

(B) (D) It shall be the duty of a guardian or conservator to:

(4)notify the court of the change of address of the ward or protected person within 3 days of the change

and send notice to all interested persons as set forth above in subsection (B)(2) unless waived by the court for good

cause shown.

(5) notify the court of the ward or protected person’s death within 3 days and send notice to all interested

persons as set forth above in subsection (B)(4).

(3) send a notice of right to object form with all inventories, notices of newly discovered assets, annual accountings,

and condition of ward reports that are sent to interested persons as set forth above in subsection (B)(1) and (B)(2).

(1)send a notice of interested party form to all interested persons at the time of mailing the initial inventory as set

forth above in subsection (B)(1). and

(2)send all annual accountings, all inventories, all notices of newly discovered assets, and all condition of ward

reports filed with the court to all interested persons as set forth above in subsection (B)(2), unless waived by the

court for good cause shown.

(E) All courts shall:

(1) hand out the Quick Reference Guide with sample forms attached to guardians and conservators when

57

Letters are delivered;

(2) ensure that all interested persons are on the certificate of mailing for inventories, annual accounting,

condition of ward reports, and motions that are filed with the court. If all interested persons are not on the certificate

of mailing, the court shall issue a Notice of Need for Corrective Action(s) form and send it to the person who filed

the document(s) to correct the certificate of mailing and send the document to all interested persons ; and

(3) send out reminders to guardians and conservators indicating annual filing deadlines 45 days prior to the

annual filing due date.

§ 6-1433 amended August 31, 2011, effective January 1, 2012; § 6-1433(B)(5) amended May 23, 2013, effective

September 1, 2013; § 6-1433(C)(2) amended August 28, 2013, effective September 1, 2013; § 6-1443(A) and (A)(1)

amended April 16, 2014, effective July 1, 2014.

§ 6-1439. Time for increase in bonds; bond review.

(A) Where the amount of a personal representative's, guardian's, or conservator's bond has been fixed on the basis of

known or anticipated assets only, and there is a subsequent material increase in the value of the assets or an increase

is anticipated, the judge shall be promptly informed of such fact and an adequate bond to cover the increased

responsibility of the personal representative, guardian, or conservator shall be furnished and filed if required by the

judge.

(B) All initial inventories shall be reviewed by the judge prior to Letters being issued to determine if a bond needs to

be set or if the previously set bond is adequate. If the judge finds the bond should be changed, the matter shall be set

for hearing unless the hearing on the bond is waived by all interested persons present at the time the guardian or

conservator is appointed.

(C) Every updated inventory filed with an accounting and every notice of newly discovered asset form filed with the

court shall be reviewed by a clerk magistrate, probate supervisor, court staff, or guardian ad litem, if one is

appointed, or by an independent third party approved by the State Court Administrator’s Office, if available, to

determine whether the bond previously set is adequate pursuant to Neb. Rev. Stat. § 30-2640 and § 6-1441. If there

is a concern that the bond previously set is not adequate, the matter shall be set for hearing before the court with

notice to all interested persons. For purposes of this paragraph, interested persons shall include all those defined in §

6-1433(B)(2).

Rule 39 amended June 1988. Renumbered and codified as § 6-1439, effective July 18, 2008; § 6-1439 amended

August 31, 2011, effective January 1, 2012.

§ 6-1441. Bonds in guardianship/conservatorship cases.

In all guardianship/conservatorship cases, the court shall order that an approved corporate surety bond be

filed in estates with a net value of more than $10,000. The bond shall be in an amount of the aggregate capital value

of the personal property of the estate in the guardian/conservator’s control plus 1 year’s estimated income from all

sources minus the value of securities and other assets deposited under arrangements requiring an order of the court

for their removal. The court, in lieu of sureties on a bond, may accept other security for the performance of the bond,

including a pledge of securities or a mortgage of land owned by the conservator/guardian. This bond shall be

reviewed by the court periodically and adjusted to reflect any increase as set out in § 6-1439.

The court may eliminate the requirement of bond or decrease or increase the required amount of any such

bond previously furnished for good cause shown.

The court shall not require a bond if the protected person executed a written, valid power of attorney that

specifically nominates a guardian or conservator and specifically does not require a bond.

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The court shall consider as one of the factors of good cause, when determining whether a bond should be

required and the amount thereof, the protected person’s choice of any attorney in fact or alternative attorney in fact.

No bond shall be required of the Office of Public Guardian or any financial institution, as that term is

defined in Neb. Rev. Stat. § 8-101(12), or any officer, director, employee, or agent of the financial institution

serving as a conservator, or any trust company serving as a conservator.

Rule 41 amended May 1990. Renumbered and codified as § 6-1441, effective July 18, 2008; § 6-1441 amended

August 31, 2011, effective January 1, 2012.

§ 6-1442. Conservator/guardian inventory and accounts; initial filing; annual filing; amended inventories; restricted accounts; court review.

(A) Within 30 days after appointment, every guardian or conservator, except a guardian appointed by a juvenile

court pursuant to the Nebraska Juvenile Code, shall prepare and file with the court a complete inventory of the estate

of the protected person pursuant to Neb. Rev. Stat. §§ 30-2647 and 30-2628, together with his or her oath or

affirmation that it is complete and accurate as far as he or she is informed. The inventory shall be sent to all

interested persons with a notice to object form, notice of interested party form, and certificate of mailing showing

copies were sent to all interested persons by first-class mail. If an inventory is not filed within 30 days after the date

it is due, the court shall issue an order to show cause why the guardian or conservator should not be removed and

shall set the same for hearing. For purposes of this paragraph, interested persons is defined under Neb. Rev. Stat. §

30-2601(10).

(B) Unless waived for good cause shown or otherwise ordered by the court, every conservator or guardian that has

control of the ward's estate shall, not later than 30 days after the expiration of 1 year after Letters are issued and

annually thereafter, file with the court a complete accounting of his or her administration with a certificate of proof

of possession form, along with the required fee and a certificate of mailing showing that copies and a notice to

object form were sent to all interested persons, including the bonding company by first-class mail postage prepaid.

The accounting shall include an updated inventory. Bank statements and brokerage reports or statements shall be

submitted with all accountings unless waived by the court for good cause shown. For purposes of this paragraph,

interested persons shall include all those defined in § 6-1433(B)(2).

(C) All guardians who do not have control of the ward’s estate shall file with the court an updated inventory along

with a certificate of mailing showing that copies and a notice of right to object form were sent to all interested

persons, including the bonding company by first-class mail postage prepaid every year based on reasonably

available information unless waived by the court for good cause shown. For purposes of this paragraph, interested

persons shall include all those defined in § 6-1433(B)(2).

(D) A conservator who has restricted accounts shall file with the court a proof of restricted account form within 10

days of being appointed.

(E) A notice of newly discovered asset form is required to be filed with the court within 30 days after the guardian

or conservator becomes aware of additional assets, gifts, awards, settlements, or inheritances over $500 not

disclosed in the current inventory along with a certificate of mailing showing that copies and a notice of right to

object form were sent to all interested persons, including the bonding company by first-class mail postage prepaid.

For purposes of this paragraph, interested persons shall include all those defined in § 6-1433(B)(2).

(F) The court shall monitor all cases in which annual accountings are required to see that the accountings are filed in

a timely manner. If an accounting is not filed within 30 days after the date it is due, the court shall issue an order to

show cause why the guardian/conservator should not be removed and shall set the same for hearing.

(G) All accountings, inventories, annual budget reports, and condition of ward reports filed with the court shall be

reviewed by a clerk magistrate, probate supervisor, court staff, or guardian ad litem, if one is appointed, or by an

59

independent third party approved by the State Court Administrator’s Office, if available, unless waived by the court.

If there is a problem and/or concern with the report, the matter shall be set for hearing before the court with notice to

all interested persons. For purposes of this paragraph, interested persons shall include all those defined in § 6-

1433(B)(2).

(H) The court shall schedule a formal due process hearing to approve the accounting upon (1) a petition requesting

approval by the guardian/conservator, (2) the request or objection of any interested person, or (3) the court's own

motion. Notice of such hearing must be given to all interested persons. and The protected person's interest shall be

safeguarded as provided in the filing of the original petition (see Neb. Rev. Stat.§ 30-2636). For purposes of this

paragraph, interested persons shall include all those defined in § 6-1433(B)(2).

Rule 42 amended June 1988. Renumbered and codified as § 6-1442, effective July 18, 2008; § 6-1442 amended

August 31, 2011, effective January 1, 2012; § 6-1442(A) amended October 17, 2012; § 6-1442(A)-(C) and (G)

amended May 23, 2013, effective September 1, 2013; § 6-1442(A) and (B) amended August 28, 2013, effective

September 1, 2013.

§ 6-1442.01. Budget process in guardianships and conservatorships.

(A) A guardian or conservator or a nominated guardian or conservator may request the court to allow the guardian

and/or conservator to annually file a budget summarizing the receipts and disbursements expected to be expended

for the year.

(B) If authorized by the court, the budget may allow for payments to the guardian and/or conservator for items such

as rent, room and board, and guardian and/or conservator fees. Effectively, this is a preapproval of these payments,

and payments up to the amounts approved are authorized. Anything above the budget amounts remains subject to §

6-1437(B).

(C) At the end of the annual reporting period unless otherwise ordered by the court, the guardian and/or conservator

shall file a report summarizing the payments made under the budget listing any payments beyond the budget, a copy

of the last bank statement, and an inventory at the end of the year and may request a budget for the next year. These

documents shall be sent to all interested persons unless waived by the court for good cause shown. For purposes of

this paragraph, interested persons shall include all those defined in § 6-1433(B)(2).

(D) Court authorization under this rule shall be made at a hearing after notice to all interested persons. However, if

the waiver of notice and hearing is signed by all interested persons, the court may enter the order without further

notice and without further hearing. For purposes of this paragraph, interested persons shall include all those defined

in § 6-1433(B)(2).

(E) If a budget has been approved, the guardian or conservator shall not be required to file an annual accounting

unless otherwise ordered by the court.

(F) If the court authorizes ATM withdrawals or cash back on a debit transactions as part of an approved budget, the

Letters of the guardian and/or conservator shall be so modified.

(G) If additional assets are received during the year for which notice to the court is required under these rules, the

court may review the budget during the year and the bond.

§ 6-1442.01 adopted May 23, 2013, effective September 1, 2013.

§ 6-1442.02. Guardians with limited authority; authority limited to not handling any assets of the ward.

A guardian or nominated guardian may apply to the court for an order that provides that the guardian shall have no

60

authority over the estate of the ward.

(A) If that order is obtained, then the guardian shall have no authority over the estate of the ward which restrictions

shall be included on the Letters issued. If the guardian becomes a representative payee, the guardian shall notify the

court and interested persons within 7 days of receiving notice of becoming a representative payee and shall apply to

the court to have the guardian’s Letters appropriately modified. The guardian shall remain subject to the requirement

of § 6-1442(E). For purposes of this paragraph, interested persons shall include all those defined in § 6-1433(B)(2).

(B) Upon application of a guardian who has received an order under this section, with notice to all interested

persons, the updated inventory may be waived by the court for good cause shown. For purposes of this paragraph,

interested persons shall include all those defined in § 6-1433(B)(2).

(C) If the guardian becomes the representative payee or has control of other assets of the ward, the guardian shall

file an accounting with the court and comply with § 6-1442(B).

§ 6-1442.02 adopted May 23, 2013, effective September 1, 2013.

§ 6-1443. Conservator/guardian Letters.

(A) Prior to being issued Letters, the guardian or conservator shall file an acceptance and the following with the

court unless waived by the court for good cause shown:

(1) address information sheet, general information sheet, inventory with an affidavit of due diligence, and a bond if

required; and

(2) an acknowledgment of financial institution form showing that the order appointing them guardian or conservator

was provided to each financial institution in which the ward, protected person, or minor has an account/assets;

(B) After the guardian or conservator has been issued Letters, the guardian or conservator shall file with the court an

acknowledgment of financial institution form showing that Letters have been provided to each financial institution

in which the ward, protected person, or minor has an account/assets. This form shall be filed with the court within 10

days of the Letters being issued. Failure to file the form shall result in suspension of your authority.

(C) Language expressly limiting powers shall be included on all Letters of guardian/conservator in the following

language: “You shall not pay yourself or your attorney compensation from the assets or income of your ward, nor

sell real property of the estate, without first obtaining an order therefore, after an application, notice to the interested

persons, and hearing thereon. The order may be entered ex parte if all interested persons have waived notice of

hearing or have executed their written consent to the fee.”

At the same time the annual accounting is filed with the court, the guardian/conservator shall file with the court an

application for payment of the previous year’s fees to the attorney and to the guardian/conservator. The specific

amount of the fees requested shall be set out in the application.

(D) The filing requirements of the guardian/conservator shall be included on all Letters of

guardianship/conservatorship.

The language on the Letters should be as follows for a conservatorship:

You are further directed to file a complete accounting of your administration of this estate, along with the

required fee, notice of right to object form, and a certificate of mailing showing copies were sent to all

interested persons, including the bonding company, by first-class mail, postage prepaid, not later than 30

days after the expiration of 1 year after the date of these Letters and annually thereafter. The accounting

shall include an updated inventory at the end of the accounting period and shall include certificates of

proof of possession for all intangible personal property existing at the end of the accounting period.

61

For a guardianship:

You are further directed to file a condition of ward report, a complete accounting of your administration of

this estate, if you have possession of the estate, along with the required fee, notice of right to object form,

and a certificate of mailing showing copies were sent to all interested persons, including the bonding

company, by first-class mail, postage prepaid, not later than 30 days after the expiration of 1 year after the

date of these Letters and annually thereafter. If you are filing an accounting, the accounting shall include

an updated inventory at the end of the accounting period and shall include certificates of proof of

possession for all intangible personal property existing at the end of the accounting period.

For a guardianship and conservatorship:

You are further directed to file a condition of ward report and a complete accounting of your

administration of this estate, along with the required fee, notice of right to object form, and a certificate of

mailing showing copies were sent to all interested persons, including the bonding company, by first-class

mail, postage prepaid, not later than 30 days after the expiration of 1 year after the date of these Letters

and annually thereafter. The accounting shall include an updated inventory at the end of the accounting

period and shall include certificates of proof of possession for all intangible personal property existing at

the end of the accounting period.

(E) Guardians/Conservators shall not make ATM withdrawals or receive cash back on a debit transaction on a

ward’s or protected person’s bank account without first receiving a court order to do so. The following language

shall be included on all Letters:

No ATM withdrawals or cash back on debit transactions without court order. The Office of Public

Guardian is prohibited from making ATM withdrawals or receiving cash back on debit transactions.

(F) The court shall order guardians/conservators to file Letters with the Register of Deeds in any county where the

ward has real property or an interest in real property. The following language shall be included on all Letters.

Guardians/conservators shall file Letters with the Register of Deeds in any county where the ward has real

property or an interest in real property.

Rule 43 amended November 1988. Renumbered and codified as § 6-1443, effective July 18, 2008; § 6-1443

amended August 31, 2011, effective January 1, 2012; § 6-1443(A) amended May 23, 2013, effective September 1,

2013; § 6-1443(D) amended August 28, 2013, effective September 1, 2013.

§ 6-1445.01. Waivers of rules in guardianships and conservatorships; procedure.

(A) In a guardianship or a conservatorship proceeding, where a waiver for good cause shown is requested, the

following procedures shall apply:

(1) A request for waiver shall be made upon application and may be considered by the court after a hearing upon

notice to all interested persons. For purposes of this paragraph, interested persons shall include all those defined in §

6-1433(B)(2).

(2) Notice of any hearing shall be given by the applicant as required by the Nebraska Probate Code.

(3) Proof of sending the application and notice of hearing to all interested persons shall be filed with the court by the

applicant.

(4) The hearing upon the application may be waived if the waiver requested is approved in writing by all interested

62

persons. The court may then enter the order without further notice and without further hearing. For purposes of this

paragraph, interested persons shall include all those defined in § 6-1433(B)(2).

(5) The court may enter an order specifying what rule requirements have been waived. Upon request by any

interested person, the court shall set forth its findings in the order.

§ 6-1445.01 adopted May 23, 2013, effective September 1, 2013.

§ 6-1449. Background checks on guardians or conservators; appointment of guardian ad litem.

(A) Disclosure of the content of the following reports to nonparties of this pending action is prohibited without the

court’s written consent. All reports filed pursuant to this rule are confidential and shall be handled in the same

manner as personal and financial information in court records under § 6-1464.

(1) A person, except for a financial institution as that term is defined in subsection (12) of Neb. Rev. Stat. § 8-101 or

its officers, directors, employees, or agents or a trust company, who has been nominated for appointment as a

guardian or conservator shall obtain a national criminal history record check, a check of the Abuse and Neglect

Registries for adults and children, a check with the sex offender registry, and a credit check through a process

approved by the State Court Administrator’s Office. The nominated guardian or conservator shall file the results of

the reports with the court at least 10 days prior to the appointment hearing date, unless waived or modified by the

court (a) for good cause shown by affidavit filed simultaneously with the petition for appointment or (b) in the event

the protected person requests an expedited hearing under Neb. Rev. Stat. § 30-2630.01.

(2) An order appointing a guardian or conservator shall not be signed by the judge until such reports have been filed

with the court and reviewed by the judge. Such reports, or the lack thereof, shall be certified either by affidavit or by

obtaining a certified copy of the reports. No reports or national criminal history record check shall be required by the

court upon the application of a petitioner for an emergency temporary guardianship or emergency temporary

conservatorship. The court may waive the requirements of this section for good cause shown.

(B) The court shall appoint a guardian ad litem if:

a. There are no interested persons. For purposes of subsection B, interested persons shall include all those

defined in § 6-1433.; or

b. The only interested persons are one or more governmental agencies paying benefits on behalf of the

ward, incapacitated person, protected person, or minor.

If the court finds that a governmental agency is reviewing the annual reports then the court may waive the

appointment of a guardian ad litem.

Rule 49 renumbered and codified as § 6-1449, effective July 18, 2008; § 6 -1449 amended August 31, 2011, effective

January 1, 2012.

§ 6-1433.01. Public Guardian Nomination Procedures.

(A) The individual filing the petition/application to appoint the Public Guardian shall provide notice of the

nomination to the Office of Public Guardian. Notice shall be given on a separate form approved by the State Court

Administrator’s Office.

(B) Upon receiving notice of nomination, the Office of Public Guardian shall file with the court, within 14 days: 1)

an acknowledgment of nomination and 2) verification of caseload capacity subject to statutory requirements of the

63

Public Guardian Act.

(C) If the Office of Public Guardian is unable to accept the nomination due to their caseload capacity status, good

cause shall be presumed to exist to deny their appointment. The appearance of the Office of Public Guardian shall

no longer be required.

(D) The court shall appoint a visitor consistent with Neb. Rev. Stat. § 30-2619.01, or a guardian ad litem pursuant to

Neb. Rev. Stat. § 30-2222(4) within ten judicial days of the filing of acknowledgement and caseload capacity

verification by the Office of Public Guardian if the verification shows the Office of Public Guardian has capacity to

take the case. If the acknowledgement and caseload capacity verification shows the Office of Public Guardian does

not have capacity to take the case, the court may request the case be placed on the Office of Public Guardian waiting

list. If the court requests the case be placed on the Office of Public Guardian waiting list the court shall appoint a

visitor consistent with Neb. Rev. Stat. § 30-2619.01, or a guardian ad litem pursuant to Neb. Rev. Stat. § 30-2222(4)

within ten judicial days of the request to place the case on the Office of Public Guardian waiting list.

(E) The visitor or Guardian Ad Litem evaluation contents shall comply with Neb. Rev. Stat. § 30-2619.03 and, to

assist the Office of Public Guardian fulfill its duties mandated by the Public Guardianship Act, the report will

include a standard form approved by the State Court Administrator’s Office to include information required by Neb.

Rev. Stat. § 30-2619.01.

(F) The Office of Public Guardian shall have ten judicial days to file responses to the visitor’s evaluation or guardian

ad litem report.

(G) Once the Office of Public Guardian receives the visitor’s report they shall file another verification of caseload

capacity within five judicial days. If the visitor or guardian ad litem report shows that there is no one other than the

Office of Public Guardian to serve as guardian and/or conservator and if the Office of Public Guardian has capacity

to take the case then the Office of Public Guardian shall not accept any additional appointments which would in the

interim cause their capacity to be exceeded before final determination is made by the court as to their appointment.

(H) Unless otherwise ordered by the court, hearing on the petition for appointment of the Office of Public Guardian

shall not take place less than 60 days but no more than 90 days from the filing of nomination.

(I) In addition to the statutory requirements, in the order to appoint the Office of Public Guardian as a guardian or

conservator, the order of appointment shall also provide:

(1) Proper notice has been given to the Office of Public Guardian;

(2) The petitioner has acted in good faith and due diligence to identify a guardian or conservator who

would serve in the best interest of the alleged incapacitated person;

(3) The appointment of the Office of the Public Guardian is necessary and does not exceed the caseload

limitations as set forth by statute;

(4) That the report of the guardian ad litem or visitor has provided supporting evidence that no person is

available for appointment as guardian or conservator, all options available to support the individual in the

least restrictive manner possible has been explored, and guardianship is a last resort; and

(5) There is no other alternative than to appoint the Office of Public Guardian.

(J) When the Office of Public Guardian has no available caseload capacity to assume the duties of guardian and

conservator at the time of the appointment, the court may order that the case be placed on the waiting list, as

provided by the Office of Public Guardian, if the court finds:

(1) Proper notice was given to the Office of Public Guardian;

(2) The petitioner has acted in good faith and due diligence to identify a guardian or conservator who

64

would serve in the best interest of the alleged incapacitated person;

(3) The appointment of the Office of Public Guardian would be necessary, but that no current caseload

capacity exists to serve the individual by the Office of Public Guardian, as set forth by statute; and

(4) That the report of the guardian ad litem or visitor as outlined in these procedures has been completed

and supports the appointment of the Office of Public Guardian, but for the lack of capacity by the Office of

Public Guardian, all options available to support the individual in the least restrictive manner possible has

been explored, and the guardianship is a last resort.

§ 6-1433.02. Public Guardian.

(A) If the Office of Public Guardian is nominated as the guardian and/or conservator, the Office of Public Guardian

shall be considered an interested person.

(B) No bond shall be required of the Office of Public Guardian.

(C) If the Office of Public Guardian is appointed guardian and/or conservator, payments to the Office of Public

Guardian will be allowed as per the established sliding fee scale as approved by the Court.

(D) If the Office of Public Guardian is appointed guardian and/or conservator, the Office of Public Guardian shall be

required to file a budget with the initial inventory. This shall be for informational purposes only. Neb. Ct. R. § 6-

1442.01 shall not apply to the Office of Public Guardian. The Office of Public Guardian shall be required to file an

annual accounting even if a budget has been provided.

(E) The Office of Public Guardian is prohibited from making ATM withdrawals or receiving cash back on debit

transactions and this shall be reflected on the Letters.

(F) If the Office of Public Guardian is nominated as the initial or successor guardian or conservator, the court shall

appoint a visitor and/or guardian ad litem, consistent with Neb. Rev. Stat. § 30-2619.01, or a guardian ad litem

pursuant to Neb. Rev. Stat. § 30-2222(4), to ensure the necessity of the guardianship and/or conservatorship,

whether there is an appropriate private guardian and/or private conservator to serve in the case and to determine the

appropriate limitations within the guardianship and/or conservatorship.

(1) If the acknowledgment of nomination and caseload capacity verification filed by the Office of Public

Guardian indicates the Office of Public Guardian has caseload capacity to take the case, the appointment of

a visitor and/or guardian ad litem will occur within ten judicial days of the court receiving the

acknowledgement.

(2) If the acknowledgement and caseload capacity verification filed by the Office of Public Guardian

indicates the Office of Public Guardian does not have caseload capacity to take the case, the court may

request the case be placed on the Public Guardian waiting list. If the court requests the case be placed on

the Office of Public Guardian’s waiting list, the court shall appoint a visitor and/or guardian ad litem within

ten judicial days of the court’s waiting list request.

(G) The court may appoint the Office of Public Guardian on a temporary basis if an emergency exists until an

evidentiary hearing can be held. The court shall appoint a visitor and/or guardian ad litem as provided in subsection

(F) above within 10 days of signing the temporary Order.

(H) An appointed visitor and/or guardian ad litem is to conduct an evaluation of the allegations of incapacity and

whether there is an appropriate private guardian and/or private conservator to serve in the case. The visitor or

guardian ad litem shall provide a written report to the court, on a form approved by the Court Administrators Office,

and allow for the filing of responses to the report in accordance with Neb. Rev. Stat. §§ 30-2619 through 30-

2619.04.

65

(I) The court should consider utilizing a multi-disciplinary screening to determine diminished capacity. The multi-

disciplinary screening shall include, but is not limited to, the individual’s: (1) medical condition; (2) cognitive

functioning; (3) daily living functional abilities; (4) consistency of functioning with his/her values, preferences and

lifetime patterns; (5) risk of harm in the context of his/her social and environmental supports; and (6) means to

enhance capacity through accommodations and effective communication techniques. This screening may be done by

a trained visitor or trained guardian ad litem that is appointed by the court.

(J) The Office of Public Guardian may file a motion to make more definite and certain a statement of functional

limitation (30-2619) regarding the determination of necessity to ascertain whether any alternative to public

guardianship or conservatorship exists.

§ 6-1443.01. Standby Guardian.

(A) If a nominated Standby Guardian is listed in a petition, the Standby Guardian shall complete all background

checks as required by Neb. Rev. Stat. § 30-2602.02 and Neb. Ct. R. § 6-1449 prior to being appointed unless waived

by the court for good cause shown.

(B) When the Standby Guardian seeks to act as guardian for the ward or incapacitated person due to the death,

unwillingness or inability to act, resignation or removal of the guardian, before Letters will be issued the Standby

Guardian must do the following:

(1) Complete a Standby Guardian Assumption of Guardianship Authority notification form and Acceptance and file

it with the court within 3 days of any of the event(s) occurring in Subsection 2. The Standby Guardian shall file a

certificate of mailing with the court showing that copies of the Standby Guardian notification form, Acceptance and

a Notice of Right to Object form were sent to all interested persons, including the bonding company, if any, by first-

class mail postage prepaid.

(2) Complete all background checks as required by Neb. Rev. Stat. § 30-2602.02 and Neb. Ct. R. § 6-1449 and file

them with the court, unless waived by the court for good cause shown

(3) File an Inventory, Affidavit of Due Diligence and Certificate of Mailing with the court showing that copies of

the Inventory and a Notice of Right to Object form were sent to all interested persons, including the bonding

company, if any, by first-class mail postage prepaid.

(C) The court shall review the inventory and background checks filed by the Standby Guardian. The court shall

determine if a bond is necessary and shall so indicate in an Order and Letters shall issue after the bond is posted, if

required. The court may in its discretion set the matter for hearing with notice to all interested parties.

(D) The Standby Guardian shall complete training within 90 days of receiving their Letters.

§ 6-1443.02. Intrastate Transfer of Guardianship and Conservatorship Cases.

When the court is informed that a ward, protected person and/or incapacitated person’s best interest would be served

by transferring a guardianship and/or conservatorship case to another county within the State of Nebraska having

concurrent jurisdiction pursuant to Neb. Rev. Stat. § 30-2212, § 30-2615 and § 30-2629 the following procedures

shall apply:

(A) No transfer to another county may be made without a hearing and notice to all interested persons.

(B) A motion for intrastate transfer shall be filed and set forth with specificity the basis upon which a transfer would

serve the best interest of the ward, protected person and/or incapacitated person.

66

(C) The movant shall send the motion and a notice of the hearing to all interested persons along with a Notice of

Right to Object Form.

(D) After a hearing, the county court of original jurisdiction shall make findings of fact setting forth how the best

interests of the ward, protected person and/or incapacitated person are met by way of transfer.

(E) If the transferring court finds venue exists in the successor court and good cause is found to transfer, the county

court shall enter a provisional transfer of jurisdiction order.

(F) The provisional transfer of jurisdiction order shall be sent to the presiding judge of the successor county court.

Thereafter the successor court shall have 14 days to either accept the transfer or deny the same, for lack of venue

only, by written order. The acceptance or denial order shall be filed in the court records of the original jurisdiction

court.

(G) If an acceptance of transfer is filed, the original jurisdiction court shall enter an order of intrastate transfer.

(H) The original court file and all exhibits shall forthwith be sent to the successor county court’s clerk for docketing.

(I) The original jurisdiction court shall maintain certified copies of all pleadings and exhibits sent to the successor

court at the time of transfer.

(J) The successor court shall schedule a status review hearing within 30 days of transfer giving all interested persons

notice of the new docket and page number, court address and judge assigned to the case.

(K) The successor court shall enter an order acknowledging receipt of the transferred case within the records of its

own court with a certified copy sent to the transferring original jurisdiction court for completion of the intrastate

transfer. The original jurisdiction court shall no longer retain jurisdiction of the proceedings once the successor

court’s acknowledgment of jurisdiction has been docketed.

(L) If the original court and proposed successor court fail to agree on transfer, the presiding judges of each county

court judicial district shall consult and resolve the manner in which the case shall thereafter proceed.

(M)Until the case is accepted by the successor court, all proceedings shall remain in the court in which the

proceedings were originally commenced.

How Do Retirement Plans and Income Taxes Fit into the Estate Plan

and the Probate?William J. Lindsey, Jr.

Gross & Welch, PC LLO, Omaha

August 12, 2015University of Nebraska College of Law, Lincoln

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TABLE OF CONTENTS

I. Gross Income.……………………………………………………………………………-2-

A. Definition of Income ……………………………………………………...……….-2-

B. Exclusions of Gross Income……………………………………………………..-4-

C. Cash Basis Taxpayer – Reported on Form 1040 or Form 1041…………………-4-

D. Savings Bond Election………………………………………………………..…-6-

E. Annuities & Basis………………………………………………………………..-7-

F. Social Security & Railroad Retirement Tier I…………………………………...-8-

G. Section 529 Plans…………………………………………………………..……-8-

II. Adjustments to Gross Income …………………………………………………………...-9-

A. Rental Property……………………………………………………………………..…..-10-

B. Capital Gains & Losses……………………………………………………..………….-10-

C. Farmers……………………………………………………………………………..…..-10-

D. Other Adjustments……………………………………………………………………….-_-

III. Exemptions…………………………………………………………………………..…-10-

IV. Deductions……………………………………………………………………………...-11-

A. Standard Deduction…………………………………………………………………….-11-

B. Itemized Deductions……………………………………………………………………-11-

C. Medical Expense Special Rules for Deceased Persons………………………………...-12-

V. Form 1040……………………………………………………………………………...-12-

A. Due Dates for Deceased Persons……………………………………………………….-13-

B. Joint Return…………………………………………………………………………….-13-

C. Estimated Taxes………………………………………………………………………..-14-

D. Self-Employment………………………………………………………………………-14-

E. Passive Losses………………………………………………………………………….-14-

F. Charitable Carryovers………………………………………………………………….-14-

G. Net Operating Loss Carryovers………………………………………………………...-15-

H. Capital Loss Carryovers………………………………………………………………..-15-

I. Credits………………………………………………………………………………….-15-

J. Refunds…………………………………………………………………………………-15-

VI. Form 1041……………………………………………………………………………...-16-

A. Obtaining the Employer Identification Number………………………………………..-16-

B. Tax Year for an Estate………………………………………………………………….-16-

C. Tax Year for a Trust……………………………………………………………………-17-

D. Alice in Wonderland – The Trust Files a Return for the Nonexistent Estate…………..-17-

E. Estimated Taxes………………………………………………………………………..-18-

VII. Income in Respect of a Decedent………………………………………………………-18-

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A. Savings Bonds………………………………………………………………………….-18-

B. IRAs & Pensions……………………………………………………………………….-19-

C. Annuities……………………………………………………………………………….-20-

D. Wages…………………………………………………………………………………..-20-

E. Self-Employed Compensation………………………………………………………….-20-

F. Grain……………………………………………………………………………………-20-

G. Installment Sales……………………………………………………………………….-21-

H. Deferred Compensation………………………………………………………………...-21-

VIII. Deductions in Respect of a Decedent…………………………………………………..-21-

A. Denial of Double Deduction…………………………………………………….......…-22-

IX. Income Tax Deduction for Estate Tax on Accrued Income……………………………-23-

X. Basis Step-Up & Step-Down………………………………………………………...…-24-

A. Section 1014……………………………………………………………………………-25-

B. Income in Respect of a Decedent……………………………………………………....-26-

C. Transfers within One Year of Death…………………………………………………...-27-

D. Sales of Loss Assets before Death……………………………………………………..-27-

E. Installment Sales……………………………………………………………………….-27-

F. Purchase Agreements Signed before Death……………………………………………-28-

G. Marital Joint Property…………………………………………………………………..-29-

H. S Corporations………………………………………………………………………….-29-

I. Partnerships…………………………………………………………………………….-29-

XI. Retirement Plans ............................................................................................................. -31-

XII. Tax Rates…………………………………………………………………………….…-37-

XIII. Authorization for SS-4 ………………………………………………………………-37-

XVI. Liability of Personal Representative for Tax Payments………………………………..-37-

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The Federal Estate tax exemption for 2015 is $5,430,000. This amount is the amount that is

exempt from Federal Estate tax after adding in adjusted taxable gifts. The author estimates that

the total number of Federal Estate tax returns on which a Federal Estate tax is due that will be

filed will be 5,000 or less. Thus most estates do not have Federal Estate tax.

Income tax planning thus becomes essential and takes first priority for most people over

estate tax planning.

A large percentage of the wealth of individuals in the United States is contained in tax

deferred retirement plans. These include individual retirement accounts (IRA’s), SIMPLE Plans,

SEP Plans, Pension Plans, Profit Sharing Plans, 403(b) annuities (generally used by certain non-

profit organizations), 401(k) (this is a provision of the Internal Revenue Code that allows for

certain types of retirement plans) and annuities. There may be other such plans.

The plans are tax deferred. They are not tax exempt. While the plans are validly held, the

income received inside the plan that has not yet been distributed is held without having to pay

current income tax. As it is withdrawn or if it otherwise becomes taxable, the plan will be

subject to income tax.

There are certain types of retirement plans that are not deductible going in. The two primary

ones are Roth plans and non-deductible IRA’s. A Roth Plan, if in place for five years and if the

recipient is 59 ½ or has died, come out income tax free.

Non-deductible contributions can be made to Individual Retirement Accounts. These

become a basis (cost for income tax purposes) for the IRA. If a person has made a non-

deductible contribution to an Individual Retirement Account, they should be filing with their

income tax returns each year Form 8606 which shows the basis. The contributions may be

returned tax free but the income earned by the Individual Retirement Account where there were

non-deductible contributions is taxable. Distributions are considered proportionately from the

non-deductible contributions compared to the total value of the account.

Very old plans (generally before 1974) may have a small component of them that are subject

to capital gains rates. Otherwise, most retirement plans are ordinary income.

There are timeframes over which they retirement plans may be taken out after death. Also,

once the participant reaches age 70 ½, there are what are known as required minimum

distributions (RMD’s). The required minimum distributions after death depend upon the date on

which the person dies and their age at the time of death.

Among the responsibilities of a Personal Representative is to file any income tax returns of

the decedent that may be due. In addition, the estate itself will need to file an income tax return.

In order to do this, you will need to have an identification number. You cannot use the social

security number of the decedent. The identification number, otherwise known as an Employer

Identification Number is obtained through the use of Form SS-4. The information can be

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obtained online and you will need to have authorization if the Personal Representative does not

obtain it themselves. A form for authorization is included with this outline.

I. GROSS INCOME

The beginning of the computation of the income tax is to determine the income. Federal

income tax law allows certain deductions to be subtracted from the income before applying the

tax rate schedules. Gross income is the income before any deductions are allowed.

A. DEFINITION OF INCOME

Gross income is defined in the Internal Revenue Code (the “Code”) as “all income from

whatever source derived.”1 When determining gross income, make the assumption that any

accession to wealth is income unless it is established that it is not income.

Gross income from a sale of an item is not the value received by the seller, but rather is the

net after subtracting the cost of the item that was sold. The value received by the seller is called

“gross receipts.”

For example, if an asset is sold for $3.00 that had a cost of $1.00, the gross receipts are $3.00

and the gross income is $2.00.

The starting point in all income tax calculations is gross income. However, the income tax is

not imposed on gross income. The income tax is imposed upon taxable income. Taxable income

is gross income less exclusions from gross income less adjustments to gross income less

deductions from adjusted gross income. Adjusted gross income is calculated as gross income

less exclusions from gross income and less adjustments to gross income. These concepts will all

be discussed later.

There are items that are specifically defined by the Code to be included in gross income. For

example, alimony is under certain circumstances defined to be part of gross income.2 Child

support is excluded from the payor spouse’s gross income.3

The income of a child for services rendered by the child is included in the child’s gross

income and not in the parent’s gross income even if the child does not receive the income.4

However, the tax can be assessed against the parent if the tax is not paid by the child.5

Generally prizes and awards are included in gross income.6 There are some exclusions for

1 I.R.C. § 61 (1984).

2 I.R.C. § 71 (1986).

3 I.R.C. § 71(c)(1) (1986).

4 I.R.C. § 73 (1954).

5 I.R.C. § 6201(c) (2010).

6 I.R.C. § 74(a) (1986).

-3-

certain qualified scholarships.7

Although there may be an exclusion from gross income in certain cases of the discharge of

indebtedness from gross income such as a discharge in a bankruptcy case,8 the Code provides

that discharge of indebtedness may provide income under certain circumstances.9 There may

also be a reduction in basis of assets or other tax attributes as a condition for the exclusion from

gross income.

There is an exclusion for gain under certain circumstances from the sale of the principal

residence.10

There is no age restriction and the exclusion for a single person is up to

$250,000.00, as well as under certain circumstances on a joint return the exclusion can be as

much as $500,000.00.11

The exclusion from the sale of a residence generally will apply only to one sale or exchange

every two years.12

One extremely important issue when conducting the estate planning is to

determine the legal ownership of the property. One of the requirements for this exclusion is that

during the five-year period ending on the date of the sale or exchange, the property has been

owned by the taxpayer and used by the taxpayer at the taxpayer’s principal residence for period

aggregating two years or more.13

Often a person will ask to have the child’s name placed on the title to real estate as a joint

tenant. Under Nebraska law this creates a current present ownership interest in the joint tenant.

If your client has her three children’s names placed on the title of the house by a deed and then

later sells the house, your client may not meet the ownership requirement. Since the client no

longer possesses ownership over the entire property for the required two-year time period, then

she would only be able to exclude the income on the one-fourth interest which she owns. Since

her three children each own one-fourth, there would be income tax on their shares payable by the

children and the funds would belong to the children. If the funds are transferred back to the

mother, a taxable gift may have been made. Careful examination of the income tax

consequences of any deed of a personal residence needs to occur with your client before drafting

a deed.

There are certain cost-sharing payments that are excludible in the agricultural area.14

Strict

requirements need to be met to obtain these exclusions.

7 I.R.C. § 117 (2002).

8 I.R.C. § 108(a)(1)(A) (2013).

9 I.R.C. § 108(a)(1) (2013).

10 I.R.C. § 121 (2010).

11 Id.

12 I.R.C. § 121(a) (2010).

13 Id.

14 I.R.C. § 126 (1980).

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B. EXCLUSIONS FROM GROSS INCOME

The most important exclusion from income in the estate planning area is the exclusion of life

insurance proceeds from gross income.15

However, this exclusion is not allowed in all

circumstances. If a person buys a life insurance policy from a prior owner of a previously issued

policy (other than the insured buying a previously issued policy on his or her own life) we have

what is known as a transfer for valuable consideration, and the net of the insurance proceeds over

the basis in the contract may be subject to income tax.16

The basis is the cost paid for the policy

plus the premiums paid after that time.

The Code now has a provision dealing with the viatical settlement17

of an insurance policy.18

Under certain circumstances, the accelerated death benefit under a viatical settlement can be

treated as an amount paid by reason of the death of an insured and thus be treated as excludible

from gross income.19

Please refer to the Code section to determine who is eligible and when the

person is eligible to receive this benefit. The purchaser of the policy, if the purchaser is other

than the insurance company, needs to meet certain special requirements.20

Another important exclusion from gross income in the estate area is the exclusion for gifts

and inheritances. A gift, bequest, devise, or inheritance is not included in gross income.21

The

exclusion does not include the income from any of the property that is received or if the item

received is the income from property—the income itself.22

Please note that income in respect of

a decedent is not excluded under I.R.C. § 102 (1986).

There is also an exclusion for compensation for injuries or sickness such as amounts received

under workmen’s compensation acts as compensation for personal injuries or sickness23

or the

amount of any damages (not including punitive damages) received on account of personal

physical injuries or physical sickness.24

C. CASH BASIS TAXPAYER – REPORTED ON FORM 1040 OR FORM 1041

Most individual taxpayers report their income on the cash basis. This means that you report

the income when received and report deductions when paid. The alternative choice is reporting

on the accrual basis. However, very few individuals report their income on this basis. Many

corporations or other business entities will use the accrual basis.

15

I.R.C. § 101(a)(1) (2013). 16

I.R.C. § 101(a)(2) (2013). 17

A viatical settlement is a settlement made during the lifetime of the insured. 18

I.R.C. § 101(g)(2) (2013). 19

I.R.C. § 101(g) (2013). 20

Id. 21

I.R.C. § 102(a) (1986). 22

I.R.C. § 102(b) (1986). 23

I.R.C. § 104(a)(1) (2002). 24

I.R.C. § 104(a)(2) (2002).

-5-

The method of accounting used by the taxpayer becomes extremely important upon his or her

death. For a cash basis taxpayer, income actually received by the taxpayer up to death is

reportable on his or her final return. Income received after the taxpayer’s death is reportable to

the legal recipient of the income. For property held in joint tenancy, the income is reportable to

the surviving joint tenant or surviving joint tenants. Often the income on a certificate of deposit

will have a Form 1099 issued under the decedent’s social security number which may include

interest paid after death. Careful allocation may be necessary to determine who the actual

recipient of the taxable income is.

An asset which has a payable on death (“POD”) beneficiary or a transfer on death (“TOD”)

beneficiary (assuming there is no surviving joint tenant) will have its income received after the

death taxed to the beneficiary. Income received through death will be taxable to the decedent. If

the asset is held in a trust or is subject to the probate estate, the trust or the estate will be the

recipient of the income.25

The federal estate tax return, Form 706, requires that the estate report income accrued up to

the date of death. The estate tax return is effectively filed on an accrual basis. The cash basis

taxpayer‘s estate may report the same interest income differently for income tax purposes from

the estate tax reporting.

Example. The cash basis decedent dies on March 16, 2013, while owning a certificate of

deposit as a joint tenant with her son. Interest is paid on the fifth day of each month on a

certificate of deposit. The interest paid on January 5, February 5, and March 5 is reported on

the decedent’s return. The interest paid on April 5 is reported on the son’s return. The

interest accrued through March 16 (11 days) is the interest earned but not yet paid on the

certificate. Although this interest is reportable as accrued interest on the Form 706, it is not

reportable on the decedent’s final return because it had not yet been received.

There is often confusion over installment sales. If an installment sale occurred during the

lifetime of the decedent, we must first determine whether or not the decedent reported all of the

gain on his or her return. If there is an installment sale, a taxpayer may elect on the return for the

year in which the sale occurred, to report all of the gain on the return for the year of sale. If the

income was reported by the decedent during his or her lifetime, then the only income reportable

after death would be the interest received after death.

If the installment sale occurred in a year for which the decedent had not yet filed the income

tax return, the personal representative has the responsibility of filing that return and for either

reporting the sale as an installment sale or reporting the gain in the year in which the sale

occurred. A personal representative has the authority to make the taxpayer’s election on his or

her return. If a taxpayer dies early in the year, the return involved may not be the final return,

but the return for the year before the year of death. By reporting on the decedent’s return, a

liability for the income taxes is created, which would be an estate tax deduction. This is likely to

be of greater benefit than the potential for an income tax deduction for the estate taxes.

25

There may be deductions for distributions of the income to the beneficiary of the estate or the

trust, but this will be discussed later.

-6-

If the installment sale has been reported by the decedent (or by his or her personal

representative) as an installment sale, the recipient(s) of the installment sale payments will pay

tax in the same manner that the decedent was paying tax. There is an exception for any estate tax

deduction on the accrued income. The net result may be a change in the percentage reported as

the estate tax would be allowed as a deduction in each year as the income is reported.

D. SAVINGS BOND ELECTION

United States savings bonds have been issued in several different denominations. The bonds

most currently seen are Series EE and HH.26

The Series E and EE bonds accrue interest every

six months. The interest is not paid in cash, but results in the value of the bond increasing. The

interest on the Series HH bonds is paid every six months and the interest is taxable as received.

Series E bonds were issued until the early 1980s. The bonds issued after that point were

Series EE bonds. Series E bonds were purchased for 75% of the face value and Series EE bonds

were purchased for 50% of the face value of the bond.

Series E bonds have a final maturity for bonds issued before December, 1965, of 40 years.

Series E bonds issued after date have a final maturity of 30 years. When the bond reaches final

maturity, it is taxable.

Series HH bonds can be purchased for cash and a conversion from the Series E or EE bond

used to be available. If the conversion has been made, the Series HH bond will be issued without

a tax being paid on the interest on the previous E or EE bond. The amount of this interest will be

shown on the front of the Series HH bond. When the Series HH bond is redeemed or reaches

final maturity, the Series E or EE interest would be taxable.

The Code provides for an election for an individual to report all accrued saving bond interest

on his or her return. All interest accrued up through the year in which the taxpayer made the

election is reportable on that year’s return.27

Interest received in later years by the increase in the

value of these bonds will be taxable in each year.

Using this election can be a very important step in the tax planning of the decedent. If the

decedent dies fairly early in the year, you may have a short year with which to work and very

little other income. The net result of making the election on the final return can amount to less

tax. By making this election for the short year, the personal representative of the decedent may

have the tax incurred at the decedent’s level. This again creates a deduction for the debt of the

income tax on the estate tax return.

The year of death often has a substantial amount of income tax deductions. For example, if a

decedent died in November or December and was in a nursing home for the entire year, there

26

There may be a few Series E or H bonds outstanding. These have matured, i.e., are no longer

paying interest. 27

I.R.C. § 454 (1983).

-7-

may be a substantial amount of medical expenses to be deducted. There may not be enough

income against which the income would be used. Making this election can result in a substantial

tax savings if there are deductions that would otherwise go unused. I call these deductions “in

search of income.”

It is imperative to remember that if the decedent died prior to filing the prior year’s return,

the election can be made for the year before the year of death. There are often more deductions

available in that year. A close examination of the decedent’s finances needs to be made before

determining whether or not make this type of election.

Another tool to be considered with Series EE bonds (or Series HH bonds that were converted

from Series E or EE bonds) is the charitable contribution. If a specific gift is made in the will of

the bond to a charity or by POD designation to the charity on the bond, the built up interest will

be paid to the charity. If the bond is paid to the charity as a result of the death of the decedent,

neither the charity nor the estate will pay any income tax.

E. ANNUITIES & BASIS

The proceeds from an annuity may be includible in income.28

A portion of an annuity

payment may be excluded.29

An exclusion ratio is applied to the annuity payment. The

exclusion ratio takes the basis in the annuity contract and spreads it out over the annuity term. If

the term is lifetime, then life expectancy is used in making this calculation. If there is a refund

feature on the annuity (i.e., a payment to be made for a particular period of years even if the

annuitant dies) there may be an adjustment involved.

If the distribution is to be made under a qualified employer retirement plan, there is a

simplified method provided in the Code depending upon the age of the annuitant at the starting

date.30

There is a 10% penalty under federal law for premature distributions from annuity

contracts.31

This applies to the portion of the annuity distribution which is includible in gross

income.32

There is a series of exceptions that should be examined at any particular situation.33

This Code section also provides for the 10% additional tax on early distributions from qualified

retirement plans.34

Nebraska imposes a state penalty which is 29.6% of the federal penalty if a

federal penalty occurs.

If the contract does not have a refund feature to deal with and the annuitant dies before the

contract is received in full, there may be a deduction for the unrecovered investment in the

28

I.R.C. § 72 (2012). 29

Id. 30

I.R.C. § 72(d) (2012). 31

I.R.C. § 72(q) (2012). 32

Id. 33

I.R.C. § 72(q)(2) (2012). 34

I.R.C. § 72(t) (2012).

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annuity (i.e., the unrecovered basis) on the decedent’s final income tax return.35

This particular

deduction is a miscellaneous itemized deduction, but it is not subject to the 2% floor on

miscellaneous itemized deductions.36

Unlike a life insurance policy which is often received income tax-free upon the payment after

death, the payment of the annuity is likely to bear a substantial income tax burden. This income

will be ordinary income. An annuity which does not make any distributions may defer the

taxpayer’s income during his or her lifetime, but sooner or later the distributions will likely be

taxable to someone.

The annuity, like the Series E or EE bond, may also be a good source of funding the

charitable bequest. This is particularly true of retirement plans whose distributions may be

entirely taxable.37

Income tax planning of an estate, particularly with the recent changes made to the federal

estate tax law, has become very important. The potential income tax consequences of different

assets must be considered in planning.

F. SOCIAL SECURITY & RAILROAD RETIREMENT TIER I

There are two tests for taxability of social security income and of Tier I railroad retirement

benefits. Tier I railroad retirement benefits is that part of the railroad benefit which is the

equivalent of social security.

For a single taxpayer, if the sum of one-half of the social security benefits plus the modified

adjusted gross income (which is the adjusted gross income not including social security and not

including certain other adjustments plus the tax-exempt interest) exceeds $25,000.00, then the

lesser of one-half of the excess or 50% of the social security is taxable. There is a second test

which can result in the amount being taxed being as high as 85% of the social security if 85% of

the social security plus 85% of the modified gross income exceeds $34,000.00. For a married

couple these amounts are $32,000.00 and $44,000.00 on a joint return.38

This is a very confusing area and is something that needs to be examined when making

distributions from an estate if the recipients of the distributions are receiving social security

income or Railroad Retirement Tier I benefits.

G. SECTION 529 PLANS

Nebraska adopted a Section 529 plan effective January 1, 2001, named the Nebraska

Educational Savings Trust.39

Other states have plans available which may be suitable for

35

I.R.C. § 72(b)(3)(A) (2012). 36

I.R.C. § 67(b)(10) (2000). 37

There are affects under the minimum distribution rules, so great care must be taken in the

beneficiary designation. 38

I.R.C. § 86 (2004).

Neb. Rev. Stat. §§ 85-1801 to 85-1813. See www.nest529.com for more information on

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investment.40

Section 529 is a qualified state tuition program plan.41

The qualified state tuition

program itself is exempt from tax. The program has to meet certain requirements provided under

Section 529 to be qualified. If the program meets these requirements there are certain tax

benefits involved. The designated beneficiary under the program and the contributor to the

program on behalf of the designated beneficiary do not pay any current income tax on the funds

while they are in the plan and meet the requirements of Section 529. In addition, for purposes of

the gift tax, Section 529 provides that the contribution to a qualified tuition program is not a

future interest in property under both Chapter 12 and Chapter 13.42

Chapter 12 is the gift tax and

Chapter 13 is the generation skipping tax.

Upon a distribution from the plan, the distribution is included in income in a manner similar

to that for an annuity unless excluded from income. Rollover provisions are provided under the

Code for rollovers to a new designated beneficiary and a change in the designated beneficiary

may occur under certain limited circumstances without taxation.

For estate taxes, the gross estate excludes the amount in a qualified tuition program for the

contributor. If the designated beneficiary dies, there would be inclusion in the estate of the

designated beneficiary.

One of the most important rules in a Section 529 Plan involves gift taxes. Front end loading

of the gift tax contribution is permitted. In effect, five years worth of contributions permitted to

be made without tax (currently $14,000.00 per year)43

can be made with the allocation of the

$14,000.00 exemption each year over the next five years.44

For example, if an individual

contributes in March 2013, the sum of $70,000.00 to a Section 529 Plan for his or her child or

grandchild, the gift tax exclusion for the years 2013 through 2017 will be used. Each year the

donor would file a gift tax return45

and report the use of the exemption until the entire gift has

been exempted. If the donor dies prior to the exemption being applied to the entire gift, the

donor’s estate would include that portion of the front-loaded amount for all years after the year

of the donor’s death. Thus, if the donor dies on January 3, 2016, only the 2017 gift would be

pulled back into the donor’s estate.

II. ADJUSTMENTS TO GROSS INCOME

Once gross income has been determined, certain adjustments are made to determine adjusted

gross income (“AGI”). AGI is used as the basis for many calculations involved in tax law. For

example, the 10% medical expense floor is based upon AGI.46

\

Nebraska’s 529 college savings plan. 40

See www.savingforcollege.com for more information. 41

I.R.C. § 529 (2009). 42

I.R.C. § 529(c)(2) (2009). 43

I.R.C. § 2503 (1998). 44

I.R.C. § 529(c)(2)(B) (2009). 45

Form 709 (due on April 15th of the following year). 46

I.R.C. § 213(a) (2010). Only that part of the medical expenses which exceeds 10% of AGI is

included in calculating itemized deductions. Medical expenses paid after death are deductible on

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A. RENTAL PROPERTY

The deductions for rental property or for royalties in most cases are allowed in determining

adjusted gross income.47

For example, the interest, taxes and depreciation or depletion would be

deductible.48

However, the passive loss rules or the at-risk rules may limit the amount

deductible.49

B. CAPITAL GAINS & LOSSES

Any capital losses may be offset against capital gains without limitation and are permitted as

a deduction which is used in determining adjusted gross income.50

Capital losses in excess of

capital gains are allowed as a deduction against ordinary income up to $3,000.00 per year.51

Any

excess capital losses are carried forward to future years.

C. OTHER ADJUSTMENTS

Other adjustments that may be involved would be certain limited trade or business

deductions of employees.52

This generally involves those that are reimbursed under certain

specified reimbursement arrangements.53

Other adjustments include self-employed individual

retirement plan contributions, individual retirement account contributions, penalties forfeited by

premature withdraw from a certificate of deposit, certain alimony expenses, certain reforestation

expenses, certain required repayments of certain unemployment compensation benefits, jury duty

pay remitted to the employer, a limited amount of moving expenses and a limited amount of

interest on education loans.54

III. EXEMPTIONS

The Code grants a personal exemption.55

For individuals, an exemption is a deduction

subtracted from AGI as part of the determination of taxable income. The personal exemption for

taxable years beginning in 2013 is $3,900.00.56

Only one person may take an exemption for a

particular individual. If a parent takes a child’s exemption, no one else may do so. In addition,

if a person has an income at a sufficiently high level, the amount of the exemption may be

the estate tax return or the decedent’s Form 1040, but not both. I.R.C. § 642(g) (2002). Those

medical expenses used to reach the 10% floor are not deductible on either return. 47

I.R.C. § 62(a)(4) (2013). 48

Id. 49

I.R.C. § 62(a)(3) (2013). 50

I.R.C. § 1211(b) (1986). 51

Id. 52

I.R.C. § 62(a)(2) (2013). 53

I.R.C. § 62(a)(2)(A) (2013). 54

I.R.C. § 62(a) (2013). 55

I.R.C. § 151 (2013). 56

Rev. Proc. 2013-15, 2013-5 I.R.B. 444 (2013).

-11-

reduced or eliminated entirely.

IV. DEDUCTIONS

A. STANDARD DEDUCTION

The standard deduction is a deduction allowed to most individuals. There are limits such as

individuals claimed as a dependent on another person’s return who has unearned income. If an

individual does not fit within one of the exceptions, he or she receives the standard deduction. If

you want to itemize, you use the itemized deductions rather than the standard deduction. If the

total of the itemized deductions does not at least equal the standard deduction, then the standard

deduction is taken.

One exception to the ability to use the standard deduction is a married couple filing separate

returns.57

If one of the two spouses files a return using itemized deductions, the other spouse

must also itemize.58

Neither an estate nor a trust is eligible for a standard deduction.59

Qualified disability trusts

provide a tax benefit for some disabled individuals who are the beneficiaries of special needs

trusts.60

This provision of the Code gives the trust a deduction equal to the personal exemption.

B. ITEMIZED DEDUCTIONS

In order to itemize, you must elect to itemize. The election is made by filing the return with

the itemized deduction schedule and using the itemized deduction amount.

Itemized deductions include medical expenses exceeding 10% of adjusted gross income;61

certain mortgage interest and certain investment interest with limitations;62

real property taxes,

personal property taxes and state, local and foreign income taxes;63

and charitable

contributions.64

In addition, there is a deduction for all of the ordinary and necessary expenses

paid or incurred during the taxable year for production, collection or income; for the

management, conservation, or maintenance of property held for the production of income; or

incurred in connection with the determination, collection, or refund of any tax.65

Those incurred

under the previous sentence are known as “miscellaneous itemized deductions.”

Miscellaneous itemized deductions are broken down into two different categories. There are

57

I.R.C. § 63(c)(6)(A) (2009). 58

Id. 59

I.R.C. § 63(c)(6)(D) (2009). 60

I.R.C. § 642(b)(2)(C) (2002). 61

I.R.C. § 213 (2010). 62

I.R.C. § 163 (2013). 63

I.R.C. § 164 (2013). 64

I.R.C. § 170 (2013). 65

I.R.C. § 212 (1954).

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certain miscellaneous itemized deductions that are deductible.66

Other miscellaneous itemized

deductions are all added together and then only the excess of the other miscellaneous itemized

deductions over 2% of the adjusted gross income is deductible.67

The miscellaneous itemized

deductions that are not included in the 2% floor include, among others, certain casualty or theft

losses.68

Gambling losses are not subject to the 2% limitation but are miscellaneous itemized

deductions (thus only deductible if you are itemizing) and only deductible to the extent of

gambling winnings. There are substantiation requirements that must be met to take gambling

losses.

C. MEDICAL EXPENSE SPECIAL RULES FOR DECEASED PERSONS

Medical expenses are deductible generally in the year in which paid, provided the services

have been rendered. If the services have not yet been rendered, the expenses are not deductible

in the year paid. This does not include health insurance premiums paid for a year. Medical

expenses include many different types of expenses, including health insurance and long term

care premiums. There may be limitations on the dollar amount of such premiums.

The general rule that medical expenses are deductible when paid differs in respect to a

decedent. If the medical expenses are paid after death during the one-year period after death,

they are treated as if paid at the time the medical expenses were incurred.69

However, if the

medical expenses are deducted on the estate tax return, they are not deductible on the decedent’s

tax return.70

The medical expenses are not deductible on the estate’s income tax return, Form

1041 but may be deductible for estate taxes on Form 706, the estate tax return.

Please note that this deduction is reported by the personal representative on the decedent’s

return. The return involved, however, may not be the final return. For example, for a person

dying March 1, 2015, with a medical expense paid on February 15, 2016, for services rendered

on December 22, 2014, the year in which the medical expense deduction would be allowable is

2014 and not the decedent’s final return, which is the 2015 return.

V. FORM 1040

The responsibility for filing the decedent’s unfiled returns is on the personal representative.

The personal representative may incur personal liability if distributions from the estate are made

66

By deductible, we mean included in itemized deductions, not that you are actually itemizing

deductions. 67

I.R.C. § 67 (2000). 68

I.R.C. § 67(b)(3) (2000). See also I.R.C. § 67(b)(6) (2000) (any deduction allowable for

impairment-related work expenses); I.R.C. § 67(b)(7) (2000) (any deduction under section 691(c)

(2004) for the estate tax incurred on income in respect of a decedent); and I.R.C. § 67(b)(10)

(2000) (the deduction for annuity payments where payments cease before investment is

recovered). 69

I.R.C. § 213(c)(1) (2010). 70

I.R.C. § 213(c)(2) (2010).

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or creditors are paid before taxes due to the United States.71

This includes all unfiled returns.

The personal representative has the authority to amend a return filed by the decedent. Normally

the statue of limitations is three years. However, for example, if there was a bad debt for a stock

that went worthless, the statue of limitations may be longer.

Remember, federal tax liens and the liability for taxes are obligations of the estate and have

priority for payment in the event of an insolvent estate.72

Failure to pay outstanding taxes can

result in personal liability on the personal representative to the extent the personal representative

has distributed assets or paid other bills.73

A. DUE DATES FOR DECEASED PERSONS

The due date of the income tax return for the deceased person remains the same had the

person been alive. The deceased person’s tax year ends with the date of his or her death, but the

return is due April 15 of the following calendar year. The due date for the return may be

extended in the normal fashion by filing Form 4868.

B. JOINT RETURN

If the decedent was married at the date of his or her death and if the surviving spouse does

not remarry before the end of the year of death, the decedent and the surviving spouse may file a

joint return.74

The full joint return standard deduction and the full exemption of the decedent are

available on the final joint return. As with any joint return, the surviving spouse has joint and

several liability with the estate for any deficiency.

Marital status at death is generally determined under state law. If a divorce is final before

death, a joint return may not be filed. If a divorce is pending at death, but is not final, the parties

are still married and may file a joint return. In states where there is an interlocutory decree, a

close examination of the statute is necessary.

71

31 U.S.C. § 3713 (1982) (Priority of Government claims):

(a)(1) A claim of the United States Government shall be paid first when--

(A) a person indebted to the Government is insolvent and--

(i) the debtor without enough property to pay all debts makes a

voluntary assignment of property;

(ii) property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or

administrator, is not enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under title 11.

(b) A representative of a person or an estate (except a trustee acting under title

11) paying any part of a debt of the person or estate before paying a claim of the

Government is liable to the extent of the payment for unpaid claims of the

Government. 72

Neb. Rev. Stat. § 30-2487(a)(3) (2009). 73

Neb. Rev. Stat. § 30-2490 (1974). 74

I.R.C. § 6013 (2003).

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In Nebraska a divorce decree that has been entered, but is not yet final, becomes final as a

result of death.75

In such a case, the parties would be treated as single and a joint return could

not be filed.

The due date of the joint return is not changed. It remains April 15. The return is signed by

the surviving spouse on behalf of both spouses if there is no personal representative appointed.

If a personal representative has been appointed before the due date for filing the return, the

personal representative must consent to the filing of a joint return in order to file a joint return.

The federal estate tax deduction for the income tax liability of the decedent who files a joint

income tax return is limited to the result of a fraction (decedent’s separate tax ÷ combined

separate taxes × joint tax).76

C. ESTIMATED TAXES

The decedent (if filing a single return) need not pay any estimated tax payments for a period

ending after his or her death. For example, a decedent who died in February need not pay the

April 15 estimated tax payment.

D. SELF-EMPLOYMENT

Self-employment taxes are the equivalent of social security and Medicare tax on a self-

employed individual. The self-employed individual pays both the employer’s share and the

employee’s share of both of these taxes. The self-employment tax is imposed on 92.35% of the

income from self employment.77

This is usually shown on Schedule C or F or on the Schedule

K-1 from the partnership coming from Form 1065. There is also an adjustment income for one-

half of the self-employment tax paid.

If a partner dies, the self-employment earnings end as a result of his or her death. The

distributed share of the ordinary income or loss subject to self-employment tax is determined

based upon the partner’s date of death.78

E. PASSIVE LOSSES

In many cases, if a person has a loss or a credit from a passive activity, the amount of that

loss would be limited by the Code. Any disallowed loss or credit is carried over to the next year.

F. CHARITABLE CARRYOVERS

Just as with net operating losses, charitable carryovers are personal to the taxpayer. The

estate cannot use the decedent’s charitable carryover.

75

Neb. Rev. Stat. § 42-372.01 (2000). 76

Treas. Reg. § 20.2053–6(f) (2009). 77

I.R.C. § 1401 (2010). 78

I.R.C. § 1402(f) (2010).

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G. NET OPERATING LOSS CARRYOVERS

Net operating loss carryovers are personal to the taxpayer. An estate cannot deduct the net

operating losses on its own returns and cannot carry its own losses back as deductions for the

decedent on any of the decedent’s returns. The estate cannot carry its own losses back on any of

the beneficiary’s returns for earlier periods. However, please note the estate or the trust unused

net operating loss carryovers and excess deductions from the year of determination can pass

through to certain beneficiaries on determination of the estate or the trust.79

A joint return for the surviving spouse for the final tax year can reduce the unavailability of

the decedent’s losses. For example, if a husband and wife regularly file joint returns, they

compute their income and net operating losses as though they were one taxpayer. Thus, the

decedent’s net operating losses can be carried forward to offset the survivor’s income in future

years. The net operating loss in the decedent’s final year can be carried back to prior joint return

years. If any of the returns were separately filed, they can only be carried back to the decedent’s

separately-filed return. However, losses sustained by the surviving spouse after the decedent

dies are not available to offset any of the decedent’s portion of the income on earlier joint

returns.

H. CAPITAL LOSS CARRYOVERS

Net capital losses are limited to $3,000.00 against ordinary income. Any excess is carried

over to future years. This loss is personal to the decedent and cannot be carried over onto the

estate’s return.

On a joint return for the decedent’s final taxable year, the decedent’s capital loss carryover

may be offset against the survivor’s capital gains even though the survivor realized it after the

deceased spouse died. However, in subsequent years, the survivor can carry only his or her own

share of the capital loss from the final joint return.80

I. CREDITS

Credits are also lost by reason of death. As with other carryover tax attributes, the decedent’s

tax credits are personal to the decedent. If the credit is refundable like the credit for income tax

withheld, the estate on filing the decedent’s final Form 1040 may be able to receive a refund.

J. REFUNDS

Refunds may be received by the estate from the decedent’s Form 1040 filed after death. If

there is to be no estate and there is a refund due, then Form 1310 should be attached to the Form

79

I.R.C. § 642(h) (2002). 80

Treas. Reg. §1.1212-1(c)(1)(iii) (1980).

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1040, and Form 1310N to the Nebraska Form 1040N. Remember that the income tax refund is

an asset for the estate tax return Form 706 and the inventory in probate court.

VI. FORM 1041

Form 1041 is the income tax return for an estate or a trust. The due date of the return if filed

on a calendar year basis is April 15 of the following calendar year. If the return (which is

possible for an estate only) is filed on a fiscal year (a year ending other than at the end of a

calendar year), the due date of the return is the 15th day of the fourth month following the close

of the fiscal year.

A. OBTAINING THE EMPLOYER IDENTIFICATION NUMBER

The Employer Identification Number (“EIN”) may be obtained online or by completing a

Form SS-4.81

Form SS-4 is completed and signed by an authorized representative of the estate or

the trust. For trusts, EIN issuance is limited to the grantor, owner, or trustor. For estates, EIN

issuance is limited to the decedent (decedent estate) or the debtor (bankruptcy estate). Usually

these are mailed to the Internal Revenue Service. The item that will be returned (within four

weeks) will be Form SS-4 with the EIN appearing in the upper right-hand corner. If a third party

requests the EIN, written authorization must be obtained. 82

If you have an estate, the EIN will need to be used to open the estate’s checking account. Do

not use the decedent’s social security number and do not use the personal representative’s social

security number. Usually a Form SS-4 is completed as part of the initial pleadings in opening

the estate.

B. TAX YEAR FOR AN ESTATE

The tax year for the estate starts with the death of the decedent. The end of the tax year is an

election that can be made by the personal representative. The personal representative can choose

the end of the initial tax year to be at the end of any calendar month which provides for a year

that is not more than 12 months following the date of death of the decedent. For example, if the

decedent died on October 15, 2012, the estate could elect to file a return for the estate ending at

the end of any calendar month beginning with October 31, 2012, and ending with September 30,

2013. The estate could not elect October 31, 2013, as the close of its tax year because the estate

would then have a tax year in excess of 12 months.

There is a major advantage for the estate in electing a fiscal year other than the calendar year.

When assets are distributed from an estate and the income of the estate is distributed with those

assets, the income is reportable on the return of the beneficiary of the estate in the year of the

beneficiary in which the year of the estate ends. In the previous example, if the September 30,

2013, year end is chosen, then any income earned by the estate during its tax year which because

81

To apply online for an EIN, see http://www.irs.gov/Businesses/Small-Businesses-&-Self

Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online. 82

See attached to the end of this outline a Form SS-4 and an example of written authorization.

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of distribution to the beneficiaries is taxable to the beneficiaries, it is reportable in the

beneficiary’s 2013 return even if the estate earned the income in the year 2012. In addition, if

the estate can be closed in less than one year, you might convert the need to file two returns into

one.

C. TAX YEAR FOR A TRUST

With one major exception, all trusts are required to be filed for the calendar year. The major

exception is the revocable trust which was a grantor trust as of the decedent’s death. The

revocable trust may, for its first two years, file a return in combination with the estate or as an

estate if there is no estate. It thus gains the benefit of the estate’s ability to file a fiscal year.83

To do this you must timely file IRS Form 8855.

D. ALICE IN WONDERLAND – THE TRUST FILES A RETURN FOR THE NONEXISTENT

ESTATE

If a decedent dies in a situation in which no probate estate is required and has a revocable

trust which meets the requirements of a qualified revocable trust, the estate and the trust may file

on the same return.84

By using the same return the trust can gain the benefits of some of the

provisions of income tax law that are applicable to estates but not to trusts.

A qualified revocable trust means any trust or portion of a trust which was treated under

I.R.C. § 676 (1986) as owned by the decedent by reason of a power in the grantor.85

Under

I.R.C. § 676 (1986), a grantor of a trust is treated as the owner of any portion of a trust where at

any time the grantor has the power revoke the trust so as to regain ownership of the trust or a

portion of the trust. This power is one that would be exercisable by the grantor, by a non-adverse

party, or by both the grantor and a non-adverse party.86

This does not include any power held by

the grantor’s spouse.87

A nonadverse party is defined as someone who is not treated under the Code as an adverse

party.88

Someone is not an adverse if they do not have a substantial beneficial interest in the

trust which would be adversely affected by either the exercise or nonexercise of the power which

he or she possesses respecting the trust.89

If a person has a general power of appointment over

the trust property, that person is considered to have a beneficial interest in the trust.90

By filing a return with the estate, the trust’s income is treated as part of the estate’s income.

This is true even if there is no probate estate. By filing as part of the estate, the trust gains the

benefit of the fiscal year availability to the estate which is not available to the trust. Remember

83

I.R.C. § 645 (1998). 84

Id. 85

I.R.C. § 645(b)(1) (1998). 86

I.R.C. § 676(a) (1986). 87

I.R.C. § 672(e) (1998). 88

I.R.C. § 672(b) (1998). 89

I.R.C. § 672(a) (1998). 90

Id.

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that a trust must file on a calendar year basis. This applies only for all taxable years of the estate

ending before the date which is two years after the death of the decedent. However, if a Form

706 is required to be filed, this can continue until the date which is six months after the date of

the final determination of the liability for federal estate tax.

The election to report on the estate’s return is made no later than the due date of the estate’s

return as extended, and once made, it is irrevocable.

E. ESTIMATED TAXES

Trusts must file estimated tax payments in the same manner as an individual. Form 1041-ES

is used for this payment. If the trust of the decedent was a grantor trust, which makes it eligible

for the election to report its income on the estate’s income tax return, it does not have to make

estimated tax payments for its two years filing as or with the estate. An estate does not make

estimated tax payments for its first two years.

VII. INCOME IN RESPECT OF A DECEDENT

Income in respect of a decedent (“IRD”) is that income which would have been reported on

the decedent’s return if the decedent had survived. Income in respect of a decedent, by its very

definition, is received after the death of a decedent. For example, a payroll check received after

the death of the decedent is not taxed on the decedent’s final return, but is taxed to the estate or

the other recipient of that check.

Income in respect of a decedent is more of an issue for a cash basis taxpayer. Remember, a

cash basis taxpayer is one who reports the income as received. An accrual basis taxpayer reports

the income when due. If the income had accrued as of the date of death, it would be reported on

the decedent’s final return. Very few individual taxpayers report on an accrual basis.

There is no step-up in basis for income in respect of a decedent.91

This type of inheritance is

partially or fully subject to income tax. In many estates today a substantial portion of the estate

is IRD. For example, an individual who has accumulated a house (paid in full), a small amount

of savings, and has a substantial 401(k) has an IRD problem. The recipients of the 401(k) will be

subject to income tax, most likely on everything received from the 401(k).

A. SAVINGS BONDS

If the decedent has not reported the interest on the United States Series E, EE or the interest

shown on the front of the Series H or HH bonds, that interest is IRD which will be subject to

income tax to the recipient. As with any other item of IRD, there can be a problem if the estate

attempts to satisfy an obligation to pay a pecuniary bequest with these bonds.

For example, if a will has a bequest of $5,000.00 to the decedent’s church, and the estate

91

Remember, for an accrual basis taxpayer, an asset whose income has accrued and has been

reported on the final return or on any other return is not income in respect of a decedent.

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satisfies that bequest by the distribution of the bonds to the church without the specific

authorization for that satisfaction of that bequest in the will, the estate has, in effect, sold the

bonds and will be taxed on the income. This problem can be avoided by having the will

specifically give the bonds to the church and providing a make-up distribution of the amount

needed to reach the total desired bequest. For example, if the bonds were worth $3,500.00 at

death, a cash bequest of $1,500.00 may be used to make up the difference.

Remember the use of IRD for charitable bequests is a solid income tax planning tool for an

estate planner. When conducting such planning, you should be certain to use the assets which

have the greatest IRD effect. For example, a direction could be placed in a will to use the bonds

which have the greatest percentage of accrued interest on them as part of the distribution if the

value of the bonds exceeds the amount of bequest.

B. IRAS & PENSIONS

All retirement plans of any type are IRD to the extent of the assets as of the date of death.

Any earnings after the date of death are taxable income but are not IRD.

The deferral of tax by the decedent can result in some large income tax consequences to the

beneficiaries of the estate. If there is a federal estate tax involved, it may produce more net to

the beneficiaries if the individual decedent incurs the tax on his or her final return rather than

having the estate or the beneficiaries incur the income tax. Although there will be a deduction

for the proportionate share of the estate tax attributable to the IRD in the retirement plan, the

deduction for the income tax due on the final return of the estate may be of more benefit than

incurring the tax later. Relative income tax brackets and the estate tax brackets need to be

waived.

In planning for the terminally ill person, you need to consider whether that person should

receive additional income. There are non-tax considerations involved in this situation. For

example, if the assets are held in a plan which is not subject to claims of creditors, then the

withdrawal of the funds during the decedent’s lifetime could subject these funds to what is, in

effect, a 100% tax, (i.e., the payment of creditors). Thus this withdrawal should only be done

when there are sufficient other assets ensuring that the probate estate will not be insolvent. In

addition, you must make certain that the beneficiaries under the will or the trust, as the case may

be, are the same as the beneficiaries on the beneficiary designation in the retirement plan.

The IRS issued minimum required distribution regulations in January 2001. The net result is

that the amount distributed in the first year the distributions are made may be substantially less

than the IRD as of the date of death. Thus there may be a multi-year effect of IRD. The

corresponding deduction for the estate taxes on the IRD might appear on a number of returns and

a careful record needs to be kept of this.

When determining whether to take a distribution from a retirement plan in the event of a

terminally ill person, remember that the terminally ill person receiving a distribution, if he or she

is under age 59 1/2, may be potentially subjected to a penalty. However, if the person is

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disabled,92

or the distribution is for medical expenses,93

there is no penalty for premature

distribution. There may be other exceptions that apply, and the avoidance of a penalty should be

closely examined before taking the distribution.

C. ANNUITIES

Annuities also produce IRD. There is no step-up in basis for annuities. This applies to

variable annuities as well. Even though the variable annuity has invested in assets which would

otherwise produce capital gains and which would produce a step-up in basis if the investment

had been made directly in these assets, the variable annuity still results in IRD over the amount

of the investment in the contract.

As with retirement plans, including individual retirement accounts, there is a 10% penalty for

premature distributions from an annuity contract.94

Again, the age involved is 59 1/2.95

Again,

there is an exception due to disability, but there is no medical expense exception as with

retirement plans.

D. WAGES

Wages are also income in respect of a decedent. This income is reportable under the term of

the recipient. For social security tax purposes, wages paid after death but in the year of death are

still subject to social security tax. The wages paid in a year after the year of the wage-earner’s

death are not subject to social security tax.96

E. SELF-EMPLOYED COMPENSATION

Income from a trade or business run by the decedent which is reported as self-employed

compensation, such as fees from a sole proprietorship, are IRD and are reportable as taxable

income on the return of the estate or other beneficiary for fees paid after death.

With regard to self-employment tax, a partner who is subject to self-employment income

pays a self-employment tax on the deceased partner’s distributive share of the partnership’s

ordinary income or loss only through the calendar month in which the partner dies.97

F. GRAIN

The question of the effect of death on crops, whether harvested or unharvested, raised by a

decedent prior to his or her death or received from tenants as rent for farmland, and whether the

crops are IRD, is an interesting one. Remember that the gross income of farmers who receive

92

I.R.C. § 72(t)(2)(A)(iii) (2012). 93

I.R.C. § 72(t)(2)(B) (2012). 94

I.R.C. § 72(q) (2012). 95

I.R.C. § 72(q)(2)(A) (2012). 96

I.R.C. § 3121(a)(14) (2008). 97

I.R.C. § 1402(f) (2010).

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crop shares as their source of income is determined based upon the year in which the crop shares

are sold.

If the landlord dies while in possession of crops which were received as rent by the landlord

who uses a cash method of accounting, the stored crops as well as the crop shares for an

unharvested crop are income in respect of a decedent.98

For growing crops, the only portion that

is IRD is that portion attributable to the rental period ending with the date of death. The

proceeds attributable to the portion of crop share which runs from the next day through the end

of the rent period are ordinary income to the estate as crop share rent.

For the farmer who raises the crops, there is a different result. If the crops had been sold but

the proceeds not yet received, in a situation when the farmer cannot cancel the transaction, there

is IRD. However, for harvested crops and livestock raised by the active farmer prior to death, for

the active farmer who reports income on the cash method of accounting, the harvested crops and

livestock which were owned at the time of death are items of property or inventory and are not

IRD.99

G. INSTALLMENT SALES

The remaining installments of principal for an installment sale may be IRD. See the

discussion under Section X, E below for the lack of a step-up in basis.

If there is any gain on the installment sale which the decedent has not reported, then there is

IRD to the extent of the gain. This gain retains its character and is an example of capital gain

that is IRD. The recipient of an installment sale’s proceeds by reason of death is not considered

to have transferred the obligation by reason of the death and the beneficiary of the estate may

continue to report the gain.100

H. DEFERRED COMPENSATION

Many nonqualified deferred compensation plans use I.R.C. § 83 (2004) to avoid current

taxation of the deferred compensation. If the employee who has such a deferred compensation

plan dies, the proceeds are IRD.101

VIII. DEDUCTIONS IN RESPECT OF A DECEDENT

Deductions in respect of a decedent (“DRD”) are the expenses the decedent incurred but

which were not yet paid prior to death. Assuming the decedent is a cash basis taxpayer, some of

these expenses may be deductions allowed to the estate or other payor.

98

Rev. Rul. 64-289, 1964-2 C.B. 173 (1964). 99

Rev. Rul. 58-436, 1958-2 C.B. 366 (1958). 100

There may be a problem if the obligation is used to satisfy a pecuniary bequest. This can be

considered to be a sale by the estate and thus a disposition which accelerates the gain and causes

taxation to the estate. 101

I.R.C. § 83 (2004).

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Remember, medical expenses are not deductible by the estate or another beneficiary, except

that a dependent’s medical expenses may be deducted when paid. The term “dependents” here

includes a deceased spouse so that your surviving spouse can deduct medical expenses of the

deceased spouse even if the medical expenses were incurred in a prior year. Of course this

assumes that the deductions are itemized. Remember that only medical expenses exceeding 10%

of AGI are actually deductible.

The IRS allows deductions in respect of the decedent. However, not all deductions are

allowed. Only certain specified deductions are allowed.102

The deductions allowed are interest

and taxes otherwise deductible, business expenses deductible under I.R.C. § 162 (2011),

depletion deductible under I.R.C. § 611 (1976), and deductions for production or collection of

income; for the management, conservation, or maintenance of property held for the production of

income; or in connection with the determination, collection, or refund of any tax all under I.R.C.

§ 212 (1954).

Alimony arrearage is probably not deductible.103

However, there is one case in which an

alimony arrearage deduction was allowed. This is the case of Laughlin’s Estate v. C.I.R., 167

F.2d 828 (9th Cir. 1948), holding that the ex-spouse would be considered a beneficiary of the

estate and thus the estate would receive a deduction for a distribution deduction rather than an

expense deduction.104

Other deductions not allowable as DRD are medical expenses, moving expenses, payment of

charitable pledges after death that are not directed by the will or trust, net operating loss

carryovers, and losses.105

If the decedent failed to pay expenses that are not on the list of deductible expenses, the

estate’s payment of those expenses does not allow the estate to deduct them for income tax

purposes unless the estate itself can find a statutory basis for deducting those in its own right.

These expenses are often deducted on Form 706 as deductions on the estate tax return rather than

on the income tax return.

A. DENIAL OF DOUBLE DEDUCTION

Any amount that is allowed under I.R.C. §§ 2053 (2002) or 2054 (1954) in computing the

taxable estate on Form 706 is not allowed as a deduction on the income tax return of either the

estate or any beneficiary unless there has been a waiver of the estate tax deduction. This does

not apply with respect to deductions allowed as DRD under I.R.C. § 691(b) (2004).

For example, expenses for the maintenance of investment property incurred after death are

deductible either on the income tax return or on the estate tax return, but not both. Expenses that

102

I.R.C. § 691(b) (2004). 103

I.R.C. § 215 (1984). 104

See also I.R.C. § 682(b) (1984). 105

I.R.C. § 165 (2010) and § 166 (1988).

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the decedent incurred but which were not yet paid for the maintenance of property held for

production of income are deductible on Form 1041 as well as on Form 706.

One of the most common areas of DRD in Nebraska is the real estate tax payment. Real

estate taxes under state law are due on December 31 of the year for which they are due. For

example, the 2012 taxes were due December 31, 2012, and payable either April 30, 2013, and

August 31, 2013, or in certain counties March 31, 2013, and July 31, 2013. For a person dying

after December 31 but before the tax has been paid, the real estate tax is a debt of the decedent

and thus qualifies as DRD.

IX. INCOME TAX DEDUCTION FOR ESTATE TAX ON ACCRUED INCOME

There is an income tax deduction for the estate tax incurred on the income in respect of a

decedent which is included in the estate and on which estate taxes are paid under I.R.C. § 691(c)

(2004). This is often called a “691(c) deduction.”

This calculation is based upon the IRD assets as shown on Form 706. In determining what is

income in respect of a decedent, do not look only at items listed as accrued interest or accrued

dividends. If there are any United States saving bonds included, check to see if there is any

interest accrued on those bonds that is income in respect of a decedent. Installment sales may

also be a hidden source of income in respect of a decedent. You should list in the description on

the estate tax return the portion of the asset which is income in respect of a decedent if the asset

is listed as one item for your convenience in determining the 691(c) deduction.

The income tax deduction for estate tax on the income in respect of a decedent is calculated

solely on the federal estate tax actually paid.106

It does not include any amounts involved in the

state death tax credit.107

In making this calculation you first determine the actual federal estate tax. You then

determine the federal estate tax that would have been paid if all items of income in respect of a

decedent had been removed from the estate. Please remember that you go to the net federal

estate tax after all credits have been subtracted. The difference is the income tax deduction for

estate tax on the income in respect of a decedent. The total income in respect of a decedent is

used as the basis of a fraction. The numerator is the IRD item involved that is included in that

income tax return and the denominator is the total IRD of a decedent shown on the estate tax

return. This fraction is then multiplied by the difference in the federal estate tax determined

above.

The estate tax deduction for a person receiving IRD is a miscellaneous itemized deduction. It

is not subject to the 2% limitation on miscellaneous itemized deductions.108

Even though there is an income tax deduction for the estate tax incurred on the inclusion of

106

I.R.C. § 691(c) (2004). 107

Id. 108

I.R.C. § 67(b)(7) (2000).

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an item of IRD in the estate tax return, because of the rate difference it is oftentimes better to

incur the income tax on the decedent’s final income tax return and take that income tax as a

deduction on the estate tax return of the decedent. When planning the estate of a terminally ill

person or someone who is at a very advanced age, you may need to consider whether you should

be having the client incur the income while still alive. However, always consider non-tax factors

such as creditors before doing this.

Since the 691(c) deduction is an itemized deduction, the beneficiaries of the estate need to

know that in order to receive any benefit from the 691(c) deduction they must be itemizing on

their returns if the IRD is paid directly to the beneficiaries. If the IRD is paid to the estate or the

trust, the 691(c) deduction is taken on Form 1041 and the net income is reported on Form K-1.

If the IRD is paid directly to the beneficiary and the beneficiary is not itemizing, the portion

of the deduction that is needed to get up to the standard deduction, in effect, is unusable because

there would have been a standard deduction available to the beneficiary anyway. If you do not

know the beneficiary’s personal income tax situation, you should be very careful in advising that

person that a particular deduction exists. Caution should always be expressed and the

beneficiaries should always be advised to discuss the matter with their own tax preparer if they

so desire.

The federal estate tax attributable to IRD is not determined by the gross IRD, but must be

determined by reducing the IRD by the DRD. The second potential problem area is if there is a

marital or a charitable deduction involved. If there is a marital or charitable deduction involved,

the IRD item may not have produced an estate tax and this fact must be taken into account in

making the calculation.

X. BASIS STEP-UP & STEP-DOWN

The phrase “stepped-up basis” is often heard in estate planning. The word “basis” is often

used in income tax discussion. Basis means the cost for income tax purposes. This may be

different from the actual cost for a number of reasons. For example, in a like-kind exchange, the

basis will be the remaining basis in the old property, plus any cash paid or liabilities assumed,

and less any liabilities assumed on the old property by the person receiving that property plus

any gain recognized. Thus the basis of the property received in a like-kind exchange will not

bear any relationship to the costs shown on the closing statement.

In income tax law we often use the phrase: “adjusted basis”. There are adjustments to basis

that are made after a property is acquired. For example, depreciation taken on an income tax

return is subtracted in determining the adjusted basis. There may be additions for improvements

to the property. For example, in a commercial property if a furnace is replaced, the basis will be

adjusted upward by the cost and then reduced each year for the depreciation taken.

There is no defined term in income tax law called “stepped-up basis”. The phrase refers to

the situation where an individual dies and has assets that have appreciated over their adjusted

basis. If I.R.C. § 1014 (2010) applies, the basis is stepped-up to the date of death value. This is

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most commonly the value shown on Form 706. If no Form 706 is filed, then it is often the

inheritance tax determination value that is used. The Form 706 or the inventory is an income tax

record for the beneficiaries.

However, the basis can be stepped-down as well. If the decedent paid $10.00 a share for a

stock which after a decline in the stock market is now worth $6.00 a share, the basis to the estate

is $6.00 a share and not the $10.00 a share that the decedent paid.

Remember one crucial element of estate planning has to be the basis issue. If an individual is

in a situation where federal estate tax will likely be due in the event of death and the individual

desires to make a gift, he or she may wish to examine the income tax basis before deciding

which property to use. Keep in mind that the basis of property acquired by a lifetime gift is the

same as the basis in the hands of the donor, adjusted by the gift tax paid with respect to such

gift.109

Another situation in which the basis does not receive a step-up is a transfer is made during

lifetime between spouses or if the transfer is incident to a divorce of a former spouse.110

Please

note that I.R.C. § 1041 (1988) applies to any transfer of property between spouses regardless of

whether the transfer is a gift or a sale or an exchange. A divorce or legal separation does not

have to be involved.111

If the election has been made under I.R.C. § 2032 (1986) for the alternate valuation or a

special use election is made under I.R.C. § 2032(a) (1986), the basis is determined by the value

shown on the estate tax return. If an exclusion is made under I.R.C. § 2031(c) (2001) dealing

with land subject to a qualified conservation easement, the basis is the basis in the hands of the

transferor.

A. Section 1014

In order to have the basis of the property acquired from the decedent determined based upon

the fair market value of the property at the date of the decedent’s death (or as otherwise provided

in I.R.C. § 1014 (2010)) the property must be acquired from the decedent.112

The following is a

non-exhaustive list of items that are treated as having been acquired from or to have passed from

the decedent:

1. A bequest, devise, or inheritance, or by the decedent’s estate from the

decedent;113

2. Property held in a living trust in which the decedent has the payment of the

income for life to or on the order of the decedent, so long as the decedent at all

109

I.R.C. § 1015 (1984). 110

I.R.C. § 1041 (1988). 111

Treas. Reg. § 1.1041–1T, Q&A (a)(2) (2003). 112

I.R.C. § 1014(b) (2010). 113

I.R.C. § 1014(b)(1) (2010).

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times had the right reserved before his or her death to revoke the trust;114

3. A living trust similar to Paragraph 2, provided that instead of the right to

revoke the trust, the decedent has the right reserved at all times before his or

her death to make any change in the enjoyment of the trust to exercise the

power to alter, amend, or terminate the trust;115

4. The use of a general power of appointment which was exercised by the

decedent by will;116

5. In the case of decedents dying after December 31, 1953, property acquired

from the decedent by reason of death, form of ownership or other conditions if

the property is included in the gross estate for estate tax purposes. This would

include joint tenancy and specifically does not apply to annuities;117

and

6. Property included in the gross estate of the decedent under I.R.C. § 2044

(1983) which deals with the inclusion of qualified terminable interest property

(“QTIP”) trusts in the estate of the spouse who received the benefit of the

QTIP.118

B. INCOME IN RESPECT OF A DECEDENT

If an asset is classified as income in respect of a decedent, there will be no step-up in basis.

Please see Section VIII discussing IRD to see whether or not the asset is subject to this rule.

Please note that annuities and retirement plans, to the extent of the value as of the date of death,

are always income in respect of a decedent to the extent that there is income. A Roth individual

retirement account (“IRA”) may have IRD if distributions are made before the five-year

establishment rule is met, because it is income unless that rule is met.

When your client comes into the office, one of the first questions they will often ask is

whether or not an inheritance is subject to income tax. In answering this question you must

determine the answer on an asset-by-asset basis. I.R.C. § 102 (1986), which excludes gifts and

inheritances from income, does not apply to all assets received at death. It does not apply to

IRD.

It is not unusual to have an estate which has assets, more than 50% of which are subject to

income tax because they are in a retirement plan. You can no longer consider an inheritance to

be free from income tax because of the dramatic change in the allocation of financial assets to

tax-deferred investments such as IRAs and retirement plans.

One tricky area is stock. While ordinarily stock is subject to the step-up in basis rules, stock

held in an IRA, a retirement plan or a variable annuity is not eligible for the stepped-up basis and

the IRD rules apply to the IRA, the plan or the annuity.

114

I.R.C. § 1014(b)(2) (2010). 115

I.R.C. § 1014(b)(3) (2010). 116

I.R.C. § 1014(b)(4) (2010). 117

I.R.C. § 1014(b)(9) (2010). 118

I.R.C. § 1014(b)(10) (2010).

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Your client’s question concerning the income tax consequences cannot be answered until you

determine the inventory and the types of assets.

C. TRANSFERS WITHIN ONE YEAR OF DEATH

If a person transfers property to a decedent within one year before the decedent’s death and

if, as a result of the decedent’s death, the property is transferred back to that same person, to the

extent that person receives the property there would be no step-up in basis.119

This does not apply to a situation where the property is transferred to a third person. For

example, if a husband received property six months before his death from his wife and

transferred that property to their daughter under his will, there will be a step-up in basis. If it is

transferred back to his wife, there will be no step-up in basis.

D. SALES OF LOSS ASSETS BEFORE DEATH

We normally talk about the step-up in basis. If an individual has assets that are not worth as

much as the basis, we may have a step-down in the basis as of death. For example, if the

decedent paid $10.00 per share for stock worth $1.00 per share at the decedent’s death, the basis

is now $1.00 per share and the loss may never be deducted by anyone. However, if the decedent

sells the assets and completes the transaction while the decedent is still alive, there is a loss

created which may be deducted on the decedent’s income tax return.

You may need to consider sales of loss assets before death if you have a client who is

terminally ill. This is particularly true if you have a client who has already sold assets in a gain

during the year in which death is likely to occur. However, you must remember that net capital

losses (in excess of capital gains) may only be deducted to the extent of $3,000.00 against

ordinary income.

E. INSTALLMENT SALES

There is no step-up in basis on an installment sale completed while the decedent is still alive.

So long as the sale is completed before death and the decedent has not elected to report all of the

gain on the decedent’s return for the year of the installment sale, the installment sale still remains

taxable to the recipient of the payments.

The theory behind this is that the reporting of income of an installment sale over a period of

years is a privilege granted by the Code. The Code normally taxes sales proceeds in the year in

which the sale proceeds are received. Normally, the receipt of the promissory note in the

installment sale would be treated as the receipt of the sales proceeds. However, the Code has

granted the privilege of installment sale reporting. Because of this special privilege, the Code

does not permit a step up in basis on an installment sale.

If the decedent has reported the entire proceeds of the installment sale on his or her return

119

I.R.C. § 1014(e) (2010).

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and the asset received by the beneficiary is a secured note, the basis in that note will be

determined as with any other note: by the fair market value of that note as reportable on the Form

706. If a discounted value is taken on the Form 706 due to the value of the collateral or the

credit rating of the buyer, there may be capital gain upon principal repayment.

F. PURCHASE AGREEMENTS SIGNED BEFORE DEATH

When a sale is considered complete for tax purposes? The real test is determining what the

successor receives: the asset itself or the right to receive the proceeds from the disposition of the

asset.

In Estate of Peterson v. Comm’r of Internal Revenue, 74 T.C. 630 (1980) aff’d sub nom.

Peterson’s Estate v. C. I. R., 667 F.2d 675 (8th Cir. 1981), the Eight Circuit stated that the U.S.

Tax Court distilled at least four requirements for determining whether sale proceeds constitute

income in respect of a decedent: (1) whether the decedent entered into a legally significant

arrangement regarding the subject matter of the sale; (2) whether the decedent performed the

substantive (nonministerial) acts required as preconditions to the sale; (3) whether there existed

at the time of the decedent’s death any economically material contingencies which might have

disrupted the sale; and (4) whether the decedent would have eventually received (actually or

constructively) the sale proceeds if he or she had lived.

If a binding executory contract for sale has been signed prior to death and if all of the

substantive steps needed to close are completed before death so that the seller has only

ministerial obligations left to perform, the sale proceeds (over the decedent’s basis) may be

IRD.120

The key seems to be whether the decedent has reduced the asset to an enforceable right

to proceeds.

If an option has been granted before death, but has not yet been exercised as of the death, the

exercise of the option after death and the closing of the transaction after death do not produce

IRD and the basis becomes the fair market value as of the date of death.121

If the option has been

exercised before death, we then look to see if the situation described in the preceding paragraph

applies.

In a long-term lease with an option to purchase under such terms which make the option

likely to be exercised (e.g., a $1.00 buyout on a personal property lease), there may be IRD.

In a case under a previous version of I.R.C. § 121 (2010) dealing with the sale of a residence

by a person over age 55 and a $125,000.00 income tax exclusion with an executory contract for

sale signed before death with the closing by the executor, the IRS held that the exclusion would

apply.122

As described above, only ministerial obligations remained. Based upon the theory

described in that Revenue Ruling, the same reasoning should apply to the current I.R.C. § 121

120

Rev. Rul. 78-32, 1978-1 C.B. 198 (1978). 121

Rev. Rul. 71-265, 1971-1 C.B. 223 (1971). 122

Rev. Rul. 82-1, 1982-1 C.B. 26 (1982).

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(2010) $250,000.00/$500,000.00 exclusion if the election is made.

G. MARITAL JOINT PROPERTY

Property that is owned by a husband and a wife as joint tenants with right of survivorship has

a special income tax situation. Remember, the basis of step-up applies only to assets included in

the estate of the decedent. In the husband and wife situation in most cases (with some rare

exceptions for property in joint tenancy from pre-1977 creation), the estate tax law automatically

includes one-half of the joint tenancy property in the estate of the first spouse to die.123

Thus,

since one-half of the property is included in the estate, one-half of the property can receive this

step-up in basis. The one-half of the property that is not included in the estate does not receive

any step-up in basis.

For example, if the husband and wife own stock in a company which has grown dramatically

in value, it may greatly affect basis. If the basis is $2.00 per share prior to the death of one of the

joint tenants and the stock is worth $32.00 per share at the time of his or her death, the basis in

the one-half that is not included in the estate remains $2.00 per share. The basis in the one-half

that is included in the estate is $34.00 per share. Thus the basis for the stock would be one-half

of the stock at $2.00 per share and one-half of the stock at $34.00 per share with a basis on the

average of $17.00 per share. If the same stock had been owned solely by the decedent, the basis

would be $32.00 per share.

H. S CORPORATIONS

If the taxpayer dies during an S corporation’s taxable year, the taxpayer prorates the S

corporation income or loss to the date of death.124

The basis in the stock in the S corporation is

stepped-up to date of death value. However, the assets in the corporation retain their pre-death

basis.

The receipt of the stock by the estate does not terminate the S corporation status. However,

if a trust is not a permissible trust as listed in I.R.C. § 1361(c)(2) (2007), the receipt by the trust

of the stock results in the termination of the S corporation status. There may be a two-year grace

period on a trust which was a grantor trust before death, but retention of the S corporation stock

by the trust after that time may result in termination of the S corporation status. This can result

in regular corporate-level taxation.

I. PARTNERSHIPS

Any entity taxed as a partnership is included in this category. This includes limited liability

companies and limited liability partnerships. The basis of the partnership interest is determined

123

I.R.C. § 2040 (1981). 124

I.R.C. § 1366 (2007) and I.R.C. § 1377(a) (2004). The S corporation, if all shareholders at any

time of the year agree, may have the calculation done based upon actual results rather than a daily

prorated amount.

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under I.R.C. § 1014 (2010).125

The basis in the partnership interest must be distinguished from

the interest in the partnership income.

The partnership’s tax year does not ordinarily terminate upon the death of the partner unless

it results in a termination of the partnership.126

Treas. Reg. § 1.706–1(c)(3)(ii) provides for the treatment of the distributive share of the

partnership’s income for the partnership tax year starting while the decedent is alive and ending

after death. The regulation reads:

The last return of a decedent partner shall include only his share of partnership taxable

income for any partnership taxable year or years ending within or with the last taxable

year for such decedent partner (i.e., the year ending with the date of his death). The

distributive share of partnership taxable income for a partnership taxable year ending

after the decedent's last taxable year is includible in the return of his estate or other

successor in interest. If the estate or other successor in interest of a partner continues to

share in the profits or losses of the partnership business, the distributive share thereof is

includible in the taxable year of the estate or other successor in interest within or with

which the taxable year of the partnership ends. See also paragraph (a)(1)(ii) of § 1.736–

1. Where the estate or other successor in interest receives distributions, any gain or loss

on such distributions is includible in its gross income for its taxable year in which the

distribution is made.

This can result in the rather anomalous situation in which the decedent received a share of the

income but the tax is paid by the estate or other successor because the income is reportable on

Schedule K-1 (Form 1065) to the estate or other successor.

If the estate or other successor sells its interest in a partnership, then if there are no unrealized

receivables or inventory, the sale will be a capital transaction, and with the step-up in basis, the

gain would be the difference from the date of death value.127

I.R.C. § 751 (2005) limits the capital gain or loss treatment for partnerships holding what is

sometimes referred to as “hot assets”. This includes unrealized receivables and substantially

appreciated inventory.128

The gain recognized in this case is ordinary and will be the excess of

the allocable portion of the sales price over the basis (generally only the inventory has a basis,

although there may be a basis in the receivables from the sale of inventory). Inventory includes

any assets which would not be capital assets or assets subject to I.R.C. § 1231 (1999) (generally

assets subject to depreciation).

The partnership may make an election to cause the outside basis of the estate in the

partnership to be allocated to the estate’s share of the inside assets. The “outside basis” is the

125

I.R.C. § 742 (1954). 126

I.R.C. § 706(c) (1997). 127

I.R.C. § 741 (2002). 128

I.R.C. § 751 (2005).

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estate’s basis in its partnership interest and the “inside basis” is the partnership’s basis in its

assets. By making this election, the outside basis is transferred inside for the benefit of that

partner. However, this applies to all estates that may ever own a partnership interest unless the

IRS permits revocation of the election. This means that depreciation must restart on the estate’s

share of the inside assets. This can result in accounting headaches for the partnership. However,

it is one of the important tax advantages of partnership taxation.

The income taxation of partnerships is very complex. There are exceptions to every rule. A

close examination needs to be made of any transaction involving an estate in a partnership

situation. Only general rules have been stated in this outline and the reader is cautioned that he

or she should review a reputable in-depth treatise in this area.

XI. RETIREMENT PLANS

Retirement plans include pension plans, profit sharing plans, 401(k)’s, SEP plans, SIMPLE

Plans, IRA’s, Roth IRA’s, and a number of other types of plans. There are also non-qualified

deferred compensation plans which are beyond the scope of this article.

A beneficiary is named for a retirement plan. These are generally contractual. The owner or

participant retains the right to change the beneficiary.

Naming the beneficiary is an essential part of the estate plan. Generally there will be a

primary beneficiary and a contingent beneficiary. The primary beneficiary receives the proceeds

if the primary beneficiary survives the participant. If the primary beneficiary does not survive

the participant, then the contingent beneficiary takes the proceeds. If the contingent beneficiary

also does not survive then we need to look at the plan. The plan often provides for beneficiaries

if there is no remaining beneficiary. Sometimes it will provide for the spouse and then the

children. Sometimes it provides for the estate. You have to look at the particular plan to

determine the answer.

You do not want to have the estate as the beneficiary. If the estate is the beneficiary it can

affect the time period over which the benefits must be taken out. In addition, you are trying to

close the estate within a relatively short period of time. You may need to get several court orders

to keep the estate open if you are trying to take out the retirement plan benefits over a period of

years. (The estate will have a maximum time period over which to take out the retirement plan

benefits which will be the end of the fifth calendar year following the year in which death

occurs.)

Another problem with having the estate as the beneficiary is that the assets that were in the

retirement plan that likely would have avoided claims of creditors are now fully subject to the

claims of the creditors of the estate.

Once the participant dies, the primary beneficiary takes the plan. Remember that the

contingent beneficiary is to receive the plan benefits if the contingent beneficiary survives the

participant and if the primary beneficiary does not survive the participant. People often make the

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mistake of thinking the contingent beneficiary takes the plan benefits that were still held by the

primary beneficiary upon the primary beneficiary’s later death. This is not correct. The primary

beneficiary needs to name his or her own beneficiaries if they want to avoid it passing it to their

own estate. This is a trap that you need to discuss with your clients.

A. Definitions

It is important to know definitions of a certain few words. This is very important for the

minimum distribution rules. The retirement plan is designed to cover retirement. It is not

designed to be kept in place for a very long time after the death of the participant. There are

minimum required distributions. These start at age 70 ½ or, if earlier, death. (Note that there are

no minimum required distributions sometimes called MRD, from a Roth IRA during the lifetime

of the participant although there are MRD’s after the death of the participant.)

The minimum distribution rules have a required beginning date (RBD). The required

beginning date is April 1 of the year after the year in which the participant reaches age 70 ½. If

you wait until that date you must take out two distributions within that first year.

The distributions must come out on or before December 31 of each year. We generally do

not recommend taking the MRD too late in the year because it is possible that there will be an

error. You would like to have time to correct that error. The other problem is if the participant

dies during the last part of the year you may not be able to get the minimum required distribution

out in time. There is a 50% penalty for failing to take the right amount. This is 50% of the

amount that should have been withdrawn but wasn’t.

The first distribution year is the year in which the participant reaches age 70 ½. The MRD is

based upon the account balance as of December 31 of the prior year. There are tables that show

the percentage that must be withdrawn. This is based upon the life expectancy. If the life

expectancy is 25 years then the amount that must be withdrawn in that year is 1/25 of the account

balance as of the prior December 31.

The table used during the participant’s lifetime is the Uniform Lifetime Table. The Uniform

Lifetime Table is found at Treas. Reg. §1.401(a)(9)-9, A-2. If the sole beneficiary is the more

than 10 years younger spouse, we look at the table found at Treas. Reg. §1.401(a)(9)-9, A-3.

Post death MRD’s are based upon the life expectancy of the designated beneficiary. These

are determined using the Single Life Table. See Treas. Reg. §1.401(a)(9)-9, A-1. Please note

that all the tables are unisex.

The age for purposes of MRD is the age the person receives in the particular calendar year

for which the distribution is made.

There are two types of calculation methods. The first is the recalculation method. Under the

recalculation method you look at the table amount for the particular year involved and use that.

The next year you use the age that is one year higher and use the table amount for that. There’s a

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divisor that is determined. These do not go down a full year for each year.

The other method is the fixed-term method. You determine the age in the first distribution

year and then take the prior year’s divisor and subtract one each year. You do not determine a

new divisor in these cases.

The recalculation method is used for lifetime distributions. It is also used during a surviving

spouse’s lifetime if the surviving spouse is the participant’s sole beneficiary. The fixed-term

method is never used to calculate MRD’s during the participant’s lifetime. The fixed-term

method is always used at the participant’s death to determine MRD’s to the beneficiary with the

exception of the spouse as described above and with the exception of the MRD for the year of

the participant’s death.

If you talk about a qualified retirement plan (this does not include IRA’s) you must take the

MRD out of each plan based upon the calculation for that plan. For IRA’s you must calculate it

separately for each IRA, but subject to certain exceptions you can take the IRA’s calculated

amount from all IRA’s or from any combination of them.

For somebody that is not a 5% owner in a qualified plan, the RBD can be delayed until the

calendar year in which the employee retires from employment. This applies to qualified plans.

The lifetime MRD’s are based upon the April 1 of the year after the age 70 ½ is received. If

the person dies either before March 31, one day before the RBD, the MRD’s are erased.

MRD’s after the death of the participant does not use an RBD. That applies only to lifetime

distributions.

In order to properly determine the MRD’s death you must determine whether or not you have

a designated beneficiary. Not every beneficiary is a designated beneficiary. Only an individual,

a group of individuals or a qualified see-through Trust can be a designated beneficiary.

The significance of having a designated beneficiary is that you can have a longer period of

time over which the MRD’s can be withdrawn. If there is no designated beneficiary the results

are less favorable.

The beneficiary designation for a designated beneficiary is an individual designated as a

beneficiary under the plan. This can be under the plan itself or by a beneficiary designation if

authorized by the plan.

If there is more than one beneficiary you may need to identify the oldest member of the

group. If the plan provides for individuals who are beneficiaries if there is no beneficiary named,

you have a designated beneficiary. However, if the estate is the beneficiary there is no

designated beneficiary and the shorter distribution period applies.

If there is more than one beneficiary there is no designated beneficiary unless all the

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beneficiaries are individuals and the life expectancy or table amount used if all the beneficiaries

are individuals is the oldest beneficiary’s life expectancy.

There is a separate accounts rule that could be looked at to see if we can use differing life

expectancies.

If you are going to use separate accounts you have a number of requirements to be met that

you will have to check.

Beneficiaries named in a beneficiary designation can result in having either designated

beneficiaries or not having designated beneficiaries. For example, if a charity is named to

receive 20% and the four children each receive 20% there are no designated beneficiaries.

However, everything is not determined as of the date of death. It is determined on September 30

of the year after the year in which death occurs. You cannot create a new beneficiary but you

can affect the beneficiaries. For example, the charity could be paid out so that on September 30

of the year after the year of death they are no longer a beneficiary. Another possibility might be

to have a disclaimer by an older beneficiary. Remember disclaimer cannot say who receives the

property but only says that the property is disclaimed, in other words treated as if the person that

is doing the disclaimer died before the participant.

Once you determine whether or not you have a designated beneficiary, you then can

determine over what period of time that the beneficiaries may receive the distributions. The first

question is did the participant die before, on or after the RBD.

If the participant died before the RBD there is one set of rules. If the surviving spouse is the

sole beneficiary it is based upon the surviving spouse’s life expectancy unless the five-year rule

applies. Distributions over the spouse’s life expectancy must begin no later than December 31 of

the year after the year of the participant’s death, or, if later, December 31 of the year the

participant would have reached age 70 ½. Remember this applies only to a spouse and only if

the spouse is the sole beneficiary.

If the individual beneficiary is not the surviving spouse (or is the surviving spouse but there

is someone who is not a designated beneficiary) the five-year rule applies. The five-year rule

requires distributions to be made during the year of death and the following five years and the

distributions must be completed by that date.

If there are multiple beneficiaries and one of them is not a designated beneficiary the five-

year rule again applies. If there is a single individual who is not the surviving spouse as the

beneficiary use the individual beneficiary’s life expectancy.

We then look at a see-through Trust. These are very complicated and you should make

certain you understand the regulations. The see-through Trust can use the life expectancy of the

oldest or the sole Trust beneficiary. If you do not have a designated beneficiary the five-year

rule applies.

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What happens for an MRD for a death after the RBD? The annual MRD’s must begin no

later than the end of the year after the year of the participant’s death. Remember the MRD for

the year of death itself may also be required.

If the surviving spouse is the sole beneficiary then we use of the surviving spouse’s life

expectancy or what would have been the life expectancy of the deceased participant, whichever

is longer.

If the individual beneficiary is not the surviving spouse, we use the individual beneficiary’s

life expectancy or, if greater, life expectancy of the deceased participant.

The estate is not a designated beneficiary. In that case the MRD is based upon the

participant’s single life expectancy (on the reduce by one each year) for the year after the year in

which death occurs.

If there are multiple beneficiaries we first determine whether the separate account rule

applies. If they do, then we apply the rules described above for each separate beneficiary. If

they do not apply then if everybody is a designated beneficiary, it’s the participant’s remaining

life expectancy or the life expectancy of the oldest designated beneficiary.

Please be very careful when trying to have a Trust named as a beneficiary. There are a lot of

traps that need to be run. If you need help in this area I recommend the Life and Death Planning

for Retirement Benefits (currently the 7th

edition) by Natalie Choate which gives a very good

explanation. This is now available by subscription on an online basis.

Distributions before age 59 ½ can be subject to a 10% early withdrawal penalty and there is

also a 2.9% early withdrawal penalty applied by the State of Nebraska.

If the surviving spouse is the sole beneficiary the surviving spouse can roll over the

participant’s retirement account into his or her own IRA. Always use a separate IRA from

anyone that that surviving spouse has already established. Please note though that if the

surviving spouse is under 59 ½ and you roll over into that surviving spouse’s IRA, it is now

treated as his or her own IRA and will be subject to a 10% early withdrawal penalty if taken out

before age 59 ½.

For this reason you must counsel the surviving spouse to determine whether or not a roll over

should be done, when it should be done, and if it should be done in phases in case that spouse

may need to take funds out of the IRA before he or she reaches age 59 ½.

Qualified retirement plans such as a pension plan, a profit sharing plan or a 401(k) are

subject to a rule that a spouse is automatically the beneficiary unless he or she has consented to

have someone else be a beneficiary. This must be signed on the correct type of form and be

notarized. Please note that this is a spouse only. In a premarital agreement, oftentimes you deal

with a retirement plan. The premarital agreement is signed before the person becomes a spouse

and the courts have interpreted the law so that the waiver is invalid. Therefore you must

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contractually agree that once the person becomes a spouse that they will sign the appropriate

waiver.

Remember divorces occur. If there is a divorce, do not make the distribution directly from

the retirement plan as that becomes taxable income to the spouse taking it out of the retirement

plan. The spouse then pays it over and now has an income tax. There may also be a penalty tax

if it’s too early. The correct result is to use a QDRO, a qualified domestic relations order.

Beneficiary designations on retirement plans, particularly qualified plans through an

employer, are subject to a trap in the event of a divorce. These are contractual or subject to

Federal law and the spouse, even with a divorce, is not automatically removed as a beneficiary.

The divorcing spouse must remove the beneficiaries and change them unless they want it to go to

the former spouse.

Remember a former spouse for Nebraska inheritance tax purposes is a Class 3 beneficiary.

They receive a $10,000 exemption and have an 18% rate. Retirement plans are subject to this

inheritance tax.

It is very important in the event of a divorce to have the client sent a letter that specifies that

they must change the beneficiary designations. In addition, remember the rules set out above on

a qualified plan. A divorce is generally not final until 30 days after it is entered (absent an

appeal) and thus the divorced individual remains a spouse until the divorce decree has become

final. Any attempt to change a beneficiary designation on a qualified plan runs into the problem

that the spouse must consent. That change could be an invalid change.

IRA’s and qualified plans are subject to the rules relating to prohibited transactions. Certain

transactions result in the possibility of the IRA being treated as having been distributed. If the

person is under age 59 ½ the penalties would apply.

For example, if the IRA is used as security for a loan, the IRA or the portion used as security

for the loan is deemed distributed to the individual. You cannot have a direct or indirect sale,

exchange or lease of property owned by an IRA and the IRA owner, his or her spouse, ancestors,

and descendents, and spouses of the IRA owner’s descendent and any entity 50% or more of

which is owned by any of these people.

It is important to note that there was a recent bankruptcy court decision in another state

where the bankruptcy court found that the IRA had engaged in a prohibited transaction. This

occurred before the bankruptcy filing. Thus the IRA was treated as entirely distributed to the

owner prior to the bankruptcy. Having been treated as being entirely distributed it is not

properly in the IRA and thus it loses its benefits for protection from creditors and becomes an

asset of the bankruptcy. There is also a substantial income tax consequence.

[Attach 3 tables that come from the regulations.]

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XII. TAX RATES

XIII. AUTHORIZATION FOR THIRD PARTY SS-4

Authorization to Obtain Employer Identification Number (EIN)

I hereby authorize [NAME OF ATTORNEY] or any member of the firm of [NAME OF LAW

FIRM] to obtain an Employer Identification Number (EIN), also known as a Taxpayer

Identification Number (TIN) for the following entity:

Entity Name: [Name of Entity]

1. I have been given a copy of the Form SS-4 to review. I have signed the Form SS-4.

2. I authorize a copy of the signed Form SS-4 to be retained in the files of [NAME OF

LAW FIRM].

3. I have read this statement and I have signed this statement.

4. I understand that I am authorizing [NAME OF ATTORNEY] or any member of the firm

of [NAME OF LAW FIRM] to apply for an to receive the EIN on my behalf and on

behalf of the entity described above and answer any questions about the completion of

the form.

5. A copy of this signed Authorization will be retained in the files of [NAME OF LAW

FIRM].

6. I understand that the assigned EIN will be disclosed to [NAME OF LAW FIRM] upon

the successful completion of the online application.

7. I understand that I will receive a computer generated notice from the IRS stating that the

EIN was assigned.

DATED: ____________, 2015.

[Name of Entity]

By: ______________________________________

[Name of Signer and Title]

XIV LIABILITY OF PERSONAL REPRESENTATIVE FOR TAX PAYMENTS

The personal representative may be liable for unpaid federal taxes (along with other federal

debts) under 31 USC §3713, which is not in the Internal Revenue Code.

31 USC §3713(a)(1) provides that:

(a) (1)a claim of the United States government shall be paid first when—

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(A)a person indebted to the government is insolvent and—

(i)the debtor without enough property to pay all debts makes a voluntary

assignment of property;

(ii)property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed; or

(B)the estate of a deceased debtor, in the custody of the executor or administrator, is

not enough to pay all debts of the debtor.

(2)this subsection does not apply to a case under title 11.

(b)a representative of a person or an estate (except a trustee acting under title 11) paying any

part of a debt of the person or estate before paying a claim of the government is liable to the

extent of the payment for unpaid claims of the government.

A personal representative of a decedent's estate (i.e., the person who is appointed by a

probate court pursuant to an estate administration) will clearly come within the scope of persons

who may be subject to personal liability under the statute, and the personal representative (if a

personal representative is in office) is usually the person who may be subject to personal liability

in the context of a decedent’s estate.129

In order for 31 USC §3713(b) to impose personal liability on a fiduciary, each of the

following elements must be present:

(1) The fiduciary must make a payment (which is not authorized).

(2) The payment must be made at a time when the estate (or other person) is insolvent, or the

payment must render the estate (or other person) insolvent.

(3) The payment must be made at a time that a claim is owing to the government.

(4) The fiduciary must have notice that the claim is owing to the government at the time of

making the payment.

The government's priority under 31 USC §3713 is subject to claims for funeral expenses,

administrative expenses, and family allowance. The claims against the decedent's estate for

funeral and administrative expenses and the family allowance have priority over federal tax

claims of the government for which it has no lien. However, such federal tax claims are superior

to claims against a decedent's estate for doctor's bills from the decedent’s last illness and wages

due a household employee.130

If the debt paid is a secured debt and payment is made from the security, the federal

129

BNA Tax Management Portfolios 832-2nd

, Estate Tax Payments and Liabilities, XI. F. 1. 130

Rev. Rul. 80-112, 19801- C.B. 306.

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insolvency statute, 31 U.S.C. section 3713(a), does not require that a federal tax claim be given

preference over a judgment creditor's perfected lien on real property.131

The determination of

priority is made under the federal tax lien act.

It is not necessary that the taxes be assessed in order for a claim of the government to exist

under 31 USC §3713(b). With respect to the estate tax, even though the exact amount of the

liability may not be known, all of the facts giving rise to that liability arise upon the death of the

decedent, and therefore the claim of the United States should arise upon the death of the

decedent.132

31 USC §3713(b) appears to impose strict liability on a fiduciary who makes a payment

which leaves the estate with insufficient funds with which to pay a debt owed to the United

States. However, courts have long departed from such a literal interpretation of the statute. It has

long been held that a fiduciary is liable only if the fiduciary had notice of the tax liability. 749

Actual knowledge of the tax liability will clearly meet this requirement. However, it is not

necessary that the fiduciary have actual knowledge of the tax liability. The required notice may

also be satisfied if the fiduciary has notice of such facts as would put a reasonably prudent

person on inquiry as to the existence of the unpaid claim of the United States. It is this knowing

disregard of the debt owed the United States that imposes liability on the fiduciary. In the

context of the estate tax, a personal representative would likely be charged with notice of the

estate tax liability that would be determined based on the facts that would arise in the reasonable

exercise of the personal representative's duties.133

131

United States v. Estate of Romani, 523 U.S. 517. (1998) 132

BNA Tax Management Portfolios 832-2nd

, Estate Tax Payments and Liabilities, XI. F. 2 .

133

Id.

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