FAQ's

Estate Planning, Probate, Wills & Trusts

What is "probate?"

"Probate" is simply the process under Oregon law by which title to an individual’s property is transferred to his/her heirs and devisees. The first step is for the personal representative nominated under the will (often called the executor in other states) to file a petition with the court seeking appointment as personal representative and to have the will "admitted" to probate. Once the order admitting the will to probate and appointing the personal representative is signed by the court, so – called "Letters Testamentary" are then issued showing that the personal representative has the legal authority to gather estate assets, pay creditors and file all estate and income tax returns. As part of the probate process, notice is given to all known creditors and published in a newspaper of general circulation. This notice and publication triggers a four-month statute of limitation period for all creditors to submit claims to the personal representative. Claims submitted after the four-month period are cut off by the statute of limitation. Importantly, a surviving spouse can petition the court for immediate release and application of estate assets for support. As part of the probate, the personal representative must also file an "inventory" of all estate assets with the court and submit accountings to the court showing all estate revenues and expenses. Upon petition and final approval by the probate court, the personal representative then distributes all remaining estate assets pursuant to the terms of the decedent’s will and closes the estate.
When is a probate necessary?

No probate is necessary for many assets owned by a decedent. For example, if a bank account or other property is owned jointly with another person with the right of survivorship (such as the surviving spouse), ownership of the bank account or property passes automatically to the survivor in accordance with the bank agreement or deed in the case of real property. This same principle applies to insurance policies and retirement savings accounts (such as IRAs, profit sharing or 401(k) plans) where it is the owner’s beneficiary designation that determines distribution of the policy proceeds or account balance at the time of his or her death. If the decedent owns only minimal assets, such as clothing and household goods – these can usually be distributed to heirs without requiring the supervision of the court.

A probate will be necessary in the following situations:

To distribute property owned by the decedent in accordance with his or her will (or under Oregon "intestate" statutes if there is no will).

To collect debts owed to the decedent or engage in litigation (a personal representative must be appointed to bring and defend a lawsuit in the name of the decedent).

To legally transfer title to real estate, bank and/or brokerage accounts and other types of property held in the name of the decedent only.

To settle any disputes among the decedent’s heirs with respect to the estate or the validity of the will.
What assets are included in the probate estate?

The most important consideration is to determine how title is held to all assets or property owned in whole or in part by the decedent. Only those assets held solely in an individual’s name (that is, not jointly with the right of survivorship) and those not distributed pursuant to a beneficiary designation are subject to probate. Title to any assets held jointly with a survivor (as in the case of most family homes and motor vehicles owned by spouses) passes automatically by operation of law to the survivor. Most family bank accounts are also held jointly by spouses – thus it is how the account ownership was designated when the account was opened that determines whether it will be included in the probate estate. This same principle also applies to all IRAs, 401(k) Profit Sharing Plans, etc. where it is the beneficiary designation on file with the plan administrator that controls the distribution of the account balance at the time of the decedent’s death. Similarly, in the case of life insurance policies owned by the decedent, it will be the beneficiary designation (and not the will) that determines how the policy death benefits will be distributed.

The rule is different for real property jointly owned with someone else as a "tenant in common." Tenants in common each own an undivided interest in the specified percentage of the property. As a result, there is no survivorship right in favor of the other tenant(s) in common. Rather, each tenant in common has the right to designate how his or her interest in the property will pass at death (either by will or under the intestate succession statutes in the absence of a will).
What does a probate accomplish?

A probate proceeding determines the claims of both the creditors and the heirs and beneficiaries of the estate. Oregon statutes provide for the procedures that both creditors and the personal representative must follow to determine which claims are to be paid in full or in part and settle any disputes with respect to the validity and amounts of claims. The probate proceeding thus provides heirs and creditors with a legal, binding process whereby the assets of the decedent are properly handled, claims are determined and paid, and any taxes on Oregon property are paid.

A regular probate proceeding in Oregon generally requires a minimum of six months to complete, and most take longer. If the estate is taxable and a federal Form 706 (estate tax return) must be filed, that alone will require that the estate be kept open a minimum of 12 months from the date the return is due (nine months from the date of death) for a total of 21 to 24 months or so in order to receive a "clearance" letter from the Internal Revenue Service. Nontaxable estates can normally be closed within eight to ten months from beginning to end, if there are no complications and if all the assets and debts can be immediately determined and taken care of.
What are the duties and responsibilities of the personal representative?

After appointment by the court, the personal representative (often called the executor or administrator in other states) is required to:

Provide notice of the filing of the probate proceeding within 30 days to all heirs and devisees of the decedent as well as certain other persons described in the statutes who are entitled to notice.

Collect the assets of the estate and file an inventory with the court.

Make a reasonably diligent search for creditors of the estate, provide personal notice of the probate proceedings to known creditors and publish a notice to creditors in a local newspaper of general circulation. Creditors then have 30 days to file any claim against the estate for debts owned to them by the decedent if personal notice was mailed to them, or four months after the newspaper notice was published whichever occurs later.

Collect all debts owed to the decedent.

Prepare and file all required federal, state and local tax returns (including income, inheritance and federal estate tax returns) and pay all taxes due.

After approval by the court, pay all remaining expenses of administration of the estate and distribute the assets to the heirs or other persons designated under the Will

Once the above are accomplished, the personal representative files a petition for an order granting discharge and upon entry of the order, the estate is closed.

Is the Personal Representative entitled to a fee and/or reimbursement of expenses?

Oregon statutes provide that the personal representative is entitled to receive compensation for services rendered to the estate as follows:

Probate Assets	Personal Representative’s Fee
First $1,000	7%
$1,000 - $10,000	$70 plus 4% of value over $1,000
$10,000 - $50,000	$430 plus 3% of value over $10,000
Over $50,000	$1,630 plus 2% of value over $50,000

The personal representative is also entitled to receive 1% of non-probate, taxable assets, excluding life insurance proceeds. The personal representative may also waive the statutory fee. This is most often done where the surviving spouse is serving as the personal representative. If the estate has more than one personal representative, the fee is not increased, but must be divided as the co-personal representatives agree or as the court may direct. Additional compensation also may be allowable by the court for "extraordinary and unusual" services not ordinarily required of a personal representative in the discharge of his or her duties. In addition, the court has the power to deny in whole or in part the personal representative’s right to compensation and may also surcharge the personal representative for any loss to the estate caused by any breach of duty.

The personal representative is entitled under Oregon statutes to recover from the estate all necessary expenses incurred in the care, management, and settlement of the estate. This provision specifically includes litigation costs in a proceeding prosecuted or defended in "in good faith and with just cause."

Oregon statutes also provide for the compensation of the personal representative’s attorney and other professionals providing services to the estate such as accountants or appraisers. With respect to the attorney, "reasonable attorney fees " may be awarded by the court only after considering such factors as the customary fees in the community for similar services; time spent by the attorney; the attorney’s experience in such matter, the amount of responsibility assumed by the attorney consider the total value of the estate, the skill displayed by the attorney and the results obtained, and such other factors as may be relevant. Any written fee agreement between the personal representative and the attorney as to the legal fees to be charged is also considered by the court. Attorneys fees are payable by the personal representative only after being approved by the court.

What about the situation where the estate is "small" – is there a more simple and less expensive type of probate proceeding?
Oregon statutes permit the handling of certain small estates within the monetary limits of the law by the filing of an affidavit containing the statutory information regarding the decedent and the property of the estate with the county probate court clerk. Under current law an affidavit under the small estate proceeding statutes may be filed only if the fair market value of the estate is $200,000 or less, with the following limitations:
- Not more than $50,000 of the fair market value of the estate is attributable to personal property; and
- Not more than $150,000 of the fair market value of the estate is attributable to real property.
A small estate affidavit may be filed after 30 days from the decedent’s death by one or more of the claiming successors (generally, the surviving spouse or heirs of the decedent); and if the decedent died with a will, any person named as personal representative in the decedent’s will. If a certified copy of the affidavit is delivered to any person who owes money to the decedent, or has possession of the decedent’s property, that person must pay, transfer, or deliver that property to the claiming successor. Under Oregon law, the transferor is discharged and released from any liability or responsibility for the transfer in the same manner and with the same effect as if the property or debt had been transferred, delivered or paid to the personal representative of the decedent’s estate. A court proceeding may be brought to compel such delivery or payment if necessary.

The claiming successor is then required to pay non-disputed claims and convey any real or personal property that is described in the affidavit to the heirs and devisees as set forth in the affidavit. Thus, the duties and powers of the claiming successor generally are the same, but in an abbreviated form, as those of a personal representative in a regular probate.
How will my estate be distributed if I don’t have a will?

"Intestate" means someone who dies without leaving a valid will, or the circumstances of dying without leaving a valid will, effectively disposing of all the estate. The term "intestate succession" means succession into property of a decendant who dies intestate or partially intestate.

The first consideration is to carefully review how title is held to all bank and brokerage accounts, real property, motor vehicles, etc. As discussed above, it is only those assets held solely in an individual’s name (without a joint tenant with the right of survivorship) that must either go through the probate process to pass title, or pass under the intestate statutes. In the absence of a will, an "interested person" (typically the surviving spouse or closest next of kin) petitions the court to be appointed personal representative. The process for administering the "intestate" estate is substantially similar to the typical probate proceeding (described above) except the final distribution of assets remaining after payment of creditors, taxes, etc. is made pursuant to Oregon statutes. The basic rule is that if the decedent is survived by a spouse and children that are "their" children, the entire remaining estate goes to the surviving spouse. If however, the decedent has surviving children from a prior marriage, then one-half of the estate goes to the surviving spouse and the remaining half goes to his/her children from the prior marriage. Only if there is no surviving spouse or children will the estate go to the decedent’s other relatives (first to surviving parents, if any; then to surviving brothers and sisters, and so on).
When do I need a new will?

As a general guideline, we recommend clients review their wills with their estate planning attorney at least every five years due to the inevitable changes in family and financial circumstances that occur over time. You will definitely need to have a new will prepared in the event of divorce or remarriage. The changes in the estate tax laws enacted in 2001 (to be revised prior to 2010) may also require that certain wills with tax-planning (credit shelter) trusts be revised to take advantage of the higher "applicable exclusion" amounts. The significant changes in the areas of "gift tax" and "generation-skipping transfer tax" made in 2001 may also require revisions to your existing will depending on your particular financial and family circumstances together with your estate planning objectives.
What are the advantages and disadvantages of a revocable living trust?

Revocable living trusts (RLTs) have become a popular alternative to the traditional will as a way to pass property to your heirs. But they have certain costs and drawbacks as well. A revocable living trust agreement is usually longer more complicated than a will, and requires transfer of title of assets to the trust that can be time-consuming and expensive if the aid of a lawyer is required. This information will assist you in making the decision if a will or RLT is the best instrument for you.

First, RLT (or inter vivos) trust is a type of testamentary instrument that provides for the management and distribution of your property both in the event of incapacity (by appointing a successor trustee) and then for the ultimate disposition of your property upon death. Once the RLT is established, the grantor (who is also the initial trustee) transfers title to all of his or her assets to the trust. Deeds, stock transfers, new bank accounts, and other legal documents are usually necessary. Any assets not formally transferred to the RLT are generally subject to probate (unless, of course, there is a beneficiary designation or it is survivorship property). For income tax purposes, the grantor is treated as the "owner" of the property, thus all income is taxable to you. Further, the grantor retains the right to withdraw property from the trust at any time or to amend or revoke the trust at any time prior to becoming incapacitated. Spouses may either have separate RLTs or use a joint RLT whereby the assets of the first spouse to die remain in trust for the benefit of the surviving spouse for his/her lifetime. In the case of a joint RLT, both spouses retain the right to withdraw his or her separate property from the trust at any time.

Any competent adult can be the trustee. Generally, the grantor(s) setting up the trust name themselves as the initial trustee, followed by an adult child or a bank or trust company as successor.

The principal advantages of a RLT include: (i) avoiding any delay and expense of probate to distribute estate assets; and (ii) maintaining the privacy of the grantor’s business and personal affairs since no court documents are filed as a matter of public record. There can also be a continuity of management of your property after your death or incapacity, especially if you do not serve as the trustee.

The principal disadvantages of using a RLT rather than a will as the primary testamentary instrument include: (i) the additional costs for transferring title to all assets to the RLT upon creation and upon the subsequent acquisition of any other assets; (ii) there is no four-month statute of limitation period to cut off claims from creditors as there is in the case of a probate (although Oregon now permits a "notice" of administration of the estate under the RLT that can serve much the same function to cut off claims), (iii) inconvenience - once the trust is established, you must be sure that trust books are maintained and that all assets continue to be registered to the trustee, ( iv) persons dealing with the trustee (such as banks and title insurance companies) generally want to review the trust instrument to confirm the trustee’s powers and duties, and (v) expenses of administration – if you appoint a bank or trust company as trustee, there will be annual administrative fees to pay. Again, if any asset (owned individually by the decedent) has not been transferred to the RLT, there will still be the need for a probate proceeding. For this reason, you will also need a so-called "pour-over" will to be used in the event title to an asset needs to be transferred to the RLT pursuant to a probate proceeding. You should also have a durable general power of attorney such that your attorney in fact can transfer any assets into the RLT in the event of your incapacity without the need for a guardianship.

One very important point to keep in mind is that there is no difference in the estate tax consequences between having a will or RLT. By itself, a RLT does not avoid income, estate or gift taxes. However, standard provisions for minimizing estate and gift taxes can be included in a RLT or a will. All assets owned by the decedent at the time of death (whether individually, jointly or through a RLT) are includible in his or her taxable estate. The primary "savings" if any, for a RLT lies in the fact that there is no statutory personal representative fee (2% of the total estate value over $50,000, plus 1% of non-probate assets and estate income) and by reducing certain attorney fees and court costs associated with the probate proceeding. Please note however, that the personal representative’s fees may be (and usually are) waived by the surviving spouse who serves as personal representative. Further, there will still be accounting and attorney fees associated with administering the RLT in order to distribute assets, pay liabilities, and file required estate and income tax returns.
What are the benefits of an irrevocable (life insurance) trust?

An irrevocable (life insurance) trust (often called an "ILIT") is a form of irrevocable trust formed for the primary purpose of owning one or more life insurance policies. The trustee of the ILIT may either apply for and own a new policy or may receive transferred policies subject to the so-called "three-year rule" (that is, if the former owner of the policy dies within three years from the date of transfer, the death benefits are includible in his/her taxable estate). The primary reason that ILITs are used is to remove the value of the death benefit from the taxable estate of the decedent. Although death benefits are received by the beneficiaries free from income tax, the policy proceeds (as well as cash value) are includible in the decedent’s taxable estate. As a result, in the situation where the estate is otherwise taxable, the net benefit to the heirs from an insurance policy may be reduced by as much as 50% (assuming the current estate tax rate).

Under the ILIT agreement, the trustee is typically given the authority to either lend money to the estate to pay death taxes or to buy estate assets thereby providing liquidity to the estate. The remaining assets in the ILIT may then be used to support the surviving spouse or children of the insured. ILITs may also be used to hold what are called "second-to-die" policies based on the life expectancies of both spouses. As a result, relatively large amounts of insurance can be purchased at fairly reasonable costs depending on the ages and health of the spouses. In most cases, the insurance policy or policies are the only assets of the ILIT. Thus, the grantor must "gift" money to the trust in order to permit the trustee to pay the policy premiums. This is usually done under the annual exclusion from gift tax following notice to beneficiaries that they have the right to withdraw their pro rata share of the gifted sums for a limited time. The beneficiary then "waives" his or her right to withdraw his/her share of the "gifted" money, after which the trustee pays the policy premium using trust funds. These notices to beneficiaries are called typically called "Crummey" notices after the taxpayer who first successfully litigated this issue.
I have a revocable living trust. Upon my death how can my successor trustee protect the estate against claims by creditors? I understand there is only a four-month statute of limitations on claims against an estate that is probated.

Under prior law, claims against a decedent’s estate could be satisfied by reaching assets of a revocable trust established by the decedent during his or her lifetime. Accordingly, any practicing professional or business owner with potential claims was well advised to consider probating at least some assets to take advantage of the relatively short four month statue of limitation period for presenting claims against the estate.

The 2001 Oregon Legislature enacted ORS 128.256-128.300 to create an optional, probate-like (but simplified) process whereby claims against a decedent’s revocable trust can be resolved. Under these statutes, the trustee of a revocable trust may (but is not required to) notify creditors that the grantor has died and that trust assets are to be distributed. If a creditor fails to file a claim during the statutory four-month period, the trustee can distribute the trust assets free of future claims. To begin the process, a petition is filed (setting forth the specified information, including the decedent’s name, date of birth, social security number; date and place of death; name of the trustee and place where claims may be presented) in the county where the grantor (decedent) was domiciled, held property or died. Next, notice in the prescribed form must be given to known claimants, heirs and published for three consecutive weeks in a newspaper of general circulation. The statutes also provide for the procedures by which claims must be presented and determined if disallowed in whole or part by the successor trustee. Finally, as in the case of probate proceedings, Oregon law provides for the order of priority for the trustee to pay claims where the amount of trust assets are insufficient to pay all allowed claims.
What are the benefits of a charitable remainder trust?

A charitable remainder trust ("CRT") is a form of split-interest trust where the donor(s) retain the right for their lifetimes to receive a specified income rate of return, and one or more charities are designated as "remaindermen" to receive the balance of the CRT assets upon the death of the surviving donor. CRTs can be a very effective estate planning tool for individuals who have highly appreciated assets and want to benefit one or more charities. Once the CRT is established, the donors transfer the highly appreciated assets to the CRT, the trustee of which is permitted to sell the assets and invest the proceeds. Since the CRT is a tax-exempt entity there is no income tax triggered on this sale. The donors are taxed only upon the income they receive from the CRT. Further, the donors are allowed a charitable deduction for the year of transfer based on the rate of income reserved, the applicable IRS interest rate and their respective life expectancies. Another common feature of estate planning using CRTs is for the donors to use the income tax "savings" from the charitable deduction to acquire additional life insurance to "replace" the assets gifted to the CRT. Thus, a "win-win" situation can be created. The donors can make a significant contribution to one or more charities, obtain a current income tax deduction for the charitable gift, retain an income stream for life, and still pass an equivalent sized estate to their heirs due to the acquisition of the additional life insurance.

There are two types of CRTs – a "charitable remainder annuity trust" and a "charitable remainder unitrust." In a "charitable remainder annuity trust," a sum certain or a specified amount is to be paid at least annually to the income beneficiaries. The specified amount may not be less than 5% of the initial net fair market value of all property placed in trust. One important consideration is that contributions may not be made to a charitable remainder annuity trust after the initial contribution, and the governing instrument (trust agreement) must contain a prohibition against future contributions. By comparison, a charitable remainder unitrust ("CRUT") is a form of CRT that specifies that the income beneficiaries are to receive annual payments based on a fixed percentage (at least 5%) of the net fair market value of the trust’s assets as determined each year. Alternatively, the CRUT can provide for the distribution each year of 5% of the net fair market value of its assets or the amount of trust income, whichever is lower. In this case, trust income excludes capital gains, and the trust assets must be valued annually. As a result, depending on how the trustee invests trust assets, income distributions can effectively be deferred to a later time when the trustee is required to "make-up" the stated income distributions. This form of CRUT is commonly called a "NIMCRUT" (net income make-up charitable remainder unitrust). Please note that additional contributions may be made to a CRUT.
What is a durable general power of attorney and do I need one?

We strongly recommend that all our estate planning clients execute a Durable General Power of Attorney (usually in favor of their spouse) to be stored with their original will designating them as "attorney-in-fact" or "agent" with full authority to deal with your business and tax affairs. Such power of attorney forms are then used by your "agent" in the event of incapacity to handle your business affairs without requiring a conservator to be appointed by the court. Having a Durable General Power of Attorney form can thus save much time and expense in the event you become temporarily or permanently incapacitated.
What is an "advance directive" (also called a "living will")?

Oregon law permits you to designate someone with the authority to make health care decisions on your behalf in the event you become incapacitated and are no longer able to do so. You may provide specific instructions to your "health care" representative or give them general authority to make decisions on your behalf. Further, you can give specific instructions to your doctors regarding your desires for certain end-of-life health care decisions such as continued life support and/or forced feeding. One very important point to note is that the "Advance Directive" is entirely voluntary and can be revoked or amended at any time.
Has "tax reform" eliminated the federal estate ("death") tax?

As of 2008 -- no. Estate, gift, and generation-skipping taxes are part of a uniform transfer tax system. The estate and gift tax share a progressive rate schedule and a unified credit (now called an "applicable exclusion amount"). The Economic Growth and Tax Relief Reconciliation Act of 2001 ("Tax Relief Act") made significant changes to the estate and gift tax system. Note: all provisions of the Tax Relief Act "sunset" on December 31, 2010. Consequently, on January 1, 2011, unless further changes are made (which commentators believe is a certainty) the gift, estate and generation-skipping transfer tax laws revert back to the pre-2001 Tax Relief Act laws.

The Tax Relief Act eliminates the federal estate tax for deaths occurring during the year 2010. Estate tax rates for deaths occurring during the years 2002 through 2009 are reduced; the highest estate tax rate drops to 50% for decedents dying, and gifts in 2002; 49% in 2003; 48% in 2004; 47% in 2005; 46% in 2006 and 45% for 2007, 2008 and 2009. Beginning in 2002, the 5% surcharge on estates between $10,000,000 and $17,184,000 is repealed; however, in 2011, the surcharge is reinstated absent further legislation. The reductions in the maximum estate tax rates will cause corresponding reductions in the rate used to determine the generation-skipping transfer (GST) tax for the years leading up to repeal.

The estate tax applicable exclusion amount was increased from $675,000 for 2001 to $1,000,000 in 2002; $1,500,000 in 2004; $2,000,000 in 2006, and $3,500,000 in 2009. The federal state death tax credit was reduced by 25% in 2002, 50% in 2003, 75% in 2004 and repealed in 2005. Barring further legislation, the federal state death tax credit will be restored, beginning in 2011.

Although further changes to the federal estate, gift and generation-skipping tax laws by the end of 2009 are a virtual certainty, the "new" applicable exclusion amount as well as the tax rates under such legislation are far from being settled. Proposals range from complete repeal (not likely) or a credit of $10 million per taxpayer coupled with a reduction in the tax rate, to a credit of $3.5 million with the tax rate either remaining at 45% or some reduction based on the size of the estate. Another proposal being floated would permit any portion of the unified credit not used by the estate of the first spouse to die to “carry-over” and be available to the estate of the surviving spouse at the time of his or her death. Our recommendation is for clients to consult with their tax advisor and attorney once the estate, gift and generation-skipping taxes laws are revised to determine whether any changes to their existing estate planning documents are necessary. In all likelihood, substantial changes will be necessary due to the anticipated changes in federal law as well as the current Oregon inheritance tax on estates in excess of $1 million.
My taxable estate will be under the federal filing threshold of $2 million for 2008- - will my estate owe any Oregon inheritance tax?

Potentially yes. An Oregon Inheritance Tax Return (Form IT-1) must be filed for dates of death on or after January 1, 2006 if the value of the gross estate is $1,000,000 or more. Oregon imposes an inheritance tax (with rates ranging from approximately 7% to 16% on estates in excess of $10 million) on taxable estates in excess of $1 million. The personal representative may however, make the so-called “special marital property” election whereby the elected assets in excess of $1 million are treated as type of marital gift eligible for the “marital deduction” thereby deferring any Oregon inheritance tax otherwise payable upon the first spouse’s death until the time of the second spouse’s death.

The application of the Oregon inheritance tax will also depend on the nature of estate assets. The 2007 Oregon Legislature passed House Bill 3201, which provides an exclusion from the inheritance tax for natural resource property or commercial fishing property -- valued up to $7.5 million if transferred to a surviving relative. “Natural resource property” means farm use and forestland as defined in ORS 308A.056, 308A.250, and 321.201. The exclusion under these provisions is available for deaths on or after January 1, 2007. Estates that qualify will need to file the new Oregon Schedule NRE with the Oregon Inheritance Tax return (Form IT-1).
How can I gift property to my spouse and children without triggering a "gift tax"?

The Tax Relief Act does not repeal the federal gift tax; however, it provides for a $1,000,000 lifetime exemption beginning in 2002. Taxable gifts made during the years 2002 through 2009 are subject to the same rates as estates. In 2010, taxable gifts in excess of $1,000,000 will be taxed at the highest marginal rate, which under the Tax Relief Act, is scheduled to be 35%. In 2011, the pre-Tax Relief Act tax laws will apply and taxable gifts will be subject to the same rates, up to 55%, as estates.

As a general rule, there are no income tax consequences for gifts between spouses due to the "unlimited marital deduction" rules. For gifts to all other individuals (whether children, grandchildren or non-related parties) the above tax rates will apply to all gifts over $12,000 per year (for 2007 and 2008) to each donee. This $12,000 annual exclusion is commonly referred to as the "annual exclusion" from gift tax. Spouses may elect "split-gift" treatment, thereby increasing the amount that may be gifted to $24,000 per donee under the "annual exclusion." Gifts to children may be outright, to a custodian under the Uniform Transfers to Minors Act, or to a trust if the property and its income may be expended by or for the minor’s benefit before he or she reaches age 21 and any balance not so expended will pass to the minor on reaching age 21 (a so-called Section 2503(c) trust). In addition to the annual exclusion, there is an unlimited gift tax exclusion for payments by a donor of the donee’s medical expenses and for tuition cost paid on behalf of a donee. For this exclusion to apply, the payments must be made directly to the medical service provider or qualifying educational institution.
How does the "generation skipping transfer tax" ("GST") apply to gifts to grandchildren?

As a general rule, "generation-skipping" transfer are those outright or in trust to beneficiaries more than one generation below the transferor’s generation. Thus the generation-skipping transfer tax acts in addition to estate and gift taxes to ensure that the transfer of wealth will be taxed on a generation-by-generation basis. There are three taxable events that are classified as generation-skipping transfers: (a) a "taxable termination" when an interest in property held in trust terminates and all interests in the trust are held by or for the benefit of persons two or more generations below that of the transferor (for example, a grandchild); (b) a "direct skip" that is, a transfer of an interest in property to or for the benefit of an individual two or more generations below that of the transferor, such as from a grandparent to a grandchild (however, if the parent of a grandchild is dead – a gift to the grandchild is not a direct skip); and (c) a "taxable distribution" which is any distribution from a GST trust that is not a "taxable termination" or "direct skip."

Individual taxpayers have a lifetime exemption for transfers otherwise subject to the GST tax. The GST tax exemption may be allocated to any property with respect to which the individual is the transferor for GST tax purposes. The allocation may be made by the transferor or the transferor’s personal representative at any time from the date of the transfer until the due date for filing the transferor’s estate tax return, regardless of whether a return is required. However, since all appreciation of transferred property designated as "exempt" remains exempt for GST purposes, the usual recommendation is to file a Form 709 for the year of transfer to claim the exemption. Further, the Form 709 will establish the value of the gift as of the date the return was filed rather then creating a potential valuation issue dispute if the exemption is claimed on the Form 706 estate tax return.

Under the Tax Relief Act, the amount of the GST tax emption for any calendar year will be equal to the estate tax applicable exclusion amount in effect for such calendar year (that is, $2,000,000 in 2007 and 2008 and $3,500,000 in 2009). Married couples may treat transfers as if made one-half by each spouse; that results in a doubling of the available exemption. Once a transfer is denoted as exempt (done by filing a timely gift tax return - IRS Form 709 (U.S. Gift (and Generation-Skipping Transfer) Tax Return), all later appreciation in the value of the exempt property is also exempt. The 2001 Tax Relief Act contains complex rules regarding how the GST exemption is to be allocated in the absence of a timely filed Form 709. Transfers not subject to the gift tax because of the annual exclusion and the unlimited exclusion for direct payment of medical and tuition expenses are not subject to the GST tax as well.

The GST tax is computed by multiplying the taxable amount of the transfer by the applicable rate. The "applicable rate" is the product of the highest estate and gift tax rate multiplied by the "inclusion ratio." The "inclusion ratio" is determined by allocating all or a portion of the transferor’s lifetime exemption to the transfer. In the case of direct skips occurring at death, the personal representative files the return and pays the tax. For direct skips during life, the transferor (donor) files the return and pays the tax. For taxable terminations, the trustee files the return and pays the tax. Finally, for "taxable distributions" from a GST trust, the transferee files the return and pays the tax.
When must a gift tax return be filed?

A gift tax return must be filed by individual donors for gifts of more than $12,000 that do not qualify for an exemption (that is, either the annual exclusion or the unlimited gift tax marital deduction allowing spouses to transfer property between themselves free of gift tax liability). Returns are filed on Form 709 (U.S. Gift (and Generation-Skipping Transfer) Tax Return). However, if a donor elects gift-splitting for all of his or her gifts and no gift tax is due, he or she may use Form 709-A (U.S. Short Form Gift Tax Return). In any event, the donor must file a return where gift splitting is elected even if no tax is due. However, no return must be filed to report a qualified transfer for education or medical purposes, or a transfer that qualifies for the gift tax marital deduction. The gift tax return is due on April 15 of the year following the year in which gifts were made.
What is a GRAT?

Grantor retained annuity trusts ("GRATs") will continue to be a useful estate planning technique until the estate tax is finally repealed. A GRAT enables the grantor to establish a trust that pays an annuity for a term of years, with the remaining trust assets going to one or more designated beneficiaries as an irrevocable gift. The amount of the gift (the remainder interest under the trust) is calculated at the time the trust is set up and consists of the amount the grantor contributes to the trust less the value of the annuity payments. Assuming that the trust assets are a successful investment, the amount remaining in the trust when the annuity payments are completed will be substantially greater than the remainder that was initially calculated. In other words, the appreciation in the trust assets will pass to the beneficiaries as part of the "remainder." On the other hand, if the assets used to fund the trust generate less income than the income payout selected, some of the trust’s principal will have to be invaded, and (ignoring appreciation) the beneficiaries will receive less than the full amount of the initial gift. However, because the gift was completed when the trust was set up, no additional gift tax is imposed on the additional assets that pass to the trust beneficiaries.

GRATs can work especially well with interests in closely held businesses such as family limited partnerships. This is because of the availability of certain valuation discounts (e.g., minority interest and lack of marketability discounts) for such assets. Such discounts are based on the premise that third-party investors will pay less for a minority interest in a "family-controlled" business. These discounts thus decrease the gift tax valuation of the assets used to fund the GRAT, but do not decrease the cash flow from the trust assets.

If the grantor dies during the term of the GRAT, his or her gross taxable estate includes only the lesser of the GRAT’s remaining principal or that amount of principal required to provide the specified annuity at the date of death. In other words, if the grantor outlives the term of the trust – there are significant gift and estate tax benefits; however, if he or she should die before the end of the specified term, there is no extra estate tax cost. Although the remainder beneficiaries do not receive a step-up in basis on the assets they revive under the GRAT (as they would in the case of "inherited" assets), for wealthier families, the minimization of gift and estate taxes by means of establishing the GRAT will result in a much greater tax "savings" due to the current higher rates of gift and estate taxes compared to income tax rates. If the grantor is the owner of the trust, neither the grantor nor the trust recognizes any gain or loss on the transfer of assets to fund the trust, or at the time of the transfer of assets from the trust to the grantor in payment of any annuity amount.

The federal tax laws specifically governing GRATs have not been changed; thus GRATs will continue to be an effective way to make lifetime transfers and reduce the size of the grantor’s taxable estate.
What is a qualified personal residence trust?

A personal residence trust is a form of grantor retained interest trust (GRIT) permitted under the tax laws (also referred to as a "qualified personal residence trust" or "QPRT"). With a QPRT, a personal residence may be put in a trust that benefits a family member, while the grantor continues to live in the home during the term of the trust. The grantor may even pay the expenses of the trust. The "income interest" in a QPRT need not be income from the residence; instead, it can be the continued use of the residence. In either case, the income interest retained by the grantor is valued using the IRS actuarial tables. During the trust term, the residence may be sold by the QPRT. At the end of the specified term, the remainderman (typically, one or more of the grantor’s children as tenants in common), either outright or in further trust, becomes the owner of the residence. Although this arrangement is generally used when the residence passes to the grantor’s child or children, such a trust could also be used when the grantor’s spouse is the beneficiary. If the QPRT does not qualify for the marital deduction, the residence would not be taxed later as part of the estate of the remainderman-spouse.

This type of trust can be most useful in the situation where the owner/grantor intends to retire at a certain age and then move out of the residence. If however, the grantor intends to continue living in the residence after the termination of the term of the trust, the remainderman (the grantor’s child or children) could, simultaneously with the creation of the QPRT, enter into a lease with the grantor with the fair market value rent to be determined when the trust terminates. If the grantor continues to reside in the residence without paying rent after the trust terminates, the residence could be includable in his or her gross estate. In addition, the IRS has permitted a lease/purchase agreement that allowed the grantor to lease or purchase the residence at its fair market value after expiration of the trust, ruling that such agreement does not affect the qualifying status of the QPRT and should not cause the inclusion of the residence in the grantor’s taxable estate.
I have heard there can be significant tax benefits using a private annuity sale for substantially appreciated assets?

Prior to 2006 - - that was true. Taxpayers who wished to remove specific property from their estate were able to do so without adverse transfer tax consequences with a private annuity sale to a family member in exchange for the buyer’s unsecured promise to make specific, periodic payment to the seller for the rest of his or her life. Basically, the private annuity sale allowed the seller to spread out the income tax on the total gain over his/her life expectancy. However, in 2006, the Internal Revenue Service issued proposed regulations under IRC § 72 (taxation of annuities) and IRC § 1001 (determination of amount of and recognition of gain or loss). These regulations dramatically changed the income tax treatment of an exchange of appreciated property for a private annuity by eliminating the deferral of income upon the exchange. Under the new rules, no longer will the gain on the exchange from the sale of appreciated property be deferred over the life of the seller (annuitant). Rather, all the gain in the asset must be recognized as of the date of the exchange. As a result, only exchanges of assets with little or no appreciation (thus generating very little taxable gain) for an annuity remain useful as an estate planning technique.
How does a self-canceling installment note work?

As a general rule, the fair market value of an unpaid installment note on the date of death is included in the taxable estate of a seller who dies before the debt is entirely satisfied. However, under current case law, no amount is includable in the gross estate of a decedent with a note containing a provision under which all obligation to pay automatically ceases on the obligee-seller’s premature death. Such notes are called "self-cancelling installment notes" ("SCINs"), and can be a very useful method to remove significant assets from the seller’s taxable estate. To withstand challenge by the IRS on the grounds that the SCIN was not a bona fide sale or that full and adequate consideration was not received, the planning before implementing a SCIN must focus on the reasonableness of believing that the seller will live out the term of the note, the reasonableness of the interest rate used under the circumstances, and the valuation of the property being sold.

To establish a bona fide installment sale of property, the term of the note should not extend beyond what the IRS gift tax table shows as the life expectancy of the seller, the interest rate should be determined by an independent expert who takes into account the risk of nonpayment presented by the seller’s death during the note’s life, and the property valuation should be supported by an independent appraisal that will stand up under challenge. If the seller’s health is poor, the recommendation is for a medical opinion to be obtained if possible, that it is reasonable to expect that the seller will live long enough to collect the note payments.

However, estate tax planning is not all that is involved with a SCIN. There are income tax consequences as well at the time the note obligations are cancelled. The IRS can argue that gain must be recognized on the cancellation of the note under either of two alternative arguments: (1) the gain is reportable on the decedent’s final return since the installment obligation is being satisfied for less than its face amount (thus producing an estate tax deduction for the income tax liability); and (2) the gain would be reportable on the estate’s income tax return on the theory that the estate must recognize gain as income in respect of a decedent because the cancellation of the notes at death must be treated as a transfer by the estate. The IRS has prevailed under both approaches in different courts.

Both the private annuity and the SCIN permit complete exclusion of the property involved and any deferred consideration received for its transfer from the seller’s taxable estate, however, both must be properly implemented to succeed. There are a number of tax and non tax considerations to be aware of:

(1) interest deductions (the buyer-obligor gets no interest deduction while making annuity payments; whereas with a SCIN, the buyer could be entitled to an interest deduction if the property was business or investment property or a personal residence);

(2) collateralization of the debt (the property transferred can act as collateral security for the SCIN obligation, but any attempt to secure the annuity with the sold property will result in the transaction being treated as fully taxable at the time it occurs);

(3) tax basis to the buyer (if the seller dies before recovering tax basis for the private annuity, there is a deduction for the unrecovered amount in the decedent’s final return whereas, if the annuitant lives beyond his or her life expectancy, the payment received are all ordinary income while the obligor adds them to the tax basis of the property, if it is still held, or claims deductible losses on a for profit transaction if the property has been sold; and

(4) effect of seller’s death (with the SCIN, the buyer may pay less if the seller dies before the note is paid, but the buyer will never pay more regardless of how long the seller lives; by comparison, under an annuity, the payments must continue for the lifetime of the annuitant, thus with the private annuity, the buyer of the property may pay less or may pay more).
What is an "incentive" trust?

A frequent concern of individuals is whether leaving a large inheritance to their children and/or grandchildren may affect their "motivation" to succeed on their own and to become financially independent. People are concerned about spoiling their offspring and making life too easy. One way estate planners can address these concerns is to create a family limited partnership or limited liability company that allows beneficiaries to familiarize themselves with handling money or investments in a structured setting. Another increasingly popular tool is the creation of an incentive trust, which rewards behavior the grantor favors. At the same time, the incentive trust can be used to provide for emergency or only "basic needs" support while deferring or denying additional distributions for so long as the "undesired" behavior of a beneficiary continues.

Generally, incentive trusts are trusts that contain one or more provisions that seek to affect a beneficiary’s behavior by conditioning a benefit - - such as the distribution of trust income or principal - - on the beneficiary’s displaying the desired behavior. Such "behaviors" vary but can include encouraging beneficiaries to work for a living, matching a beneficiary’s earned income with a stated percentage of trust distributions. Incentive trusts can also include provisions for distributions for higher educational expenses only so long as the beneficiary maintains a certain grade point average. In addition, the trust agreement can provide for a certain amount of principal distribution upon the beneficiary obtaining a college degree or completing a professional program or graduate school. In addition to "incentives", an incentive trust can also contain a "safety net" provision that ensures that the beneficiary is not left destitute (that is, the trustee has authority to distribute income or principal for a beneficiary’s education, medical care and long-term care if the beneficiary’s income falls below a certain amount). In addition, an incentive type trust could contain provisions directing the trustee to make certain or additional distributions if the beneficiary chooses to work as a volunteer or otherwise in an area that is deemed to benefit society, but perhaps will not provide sufficient income to support the beneficiary and his or her family.

Families also may have "difficult" or "problem" beneficiaries such as children or grandchildren who engage in self-destructive behavior such as alcohol and drug abuse or criminal behavior. In these cases, the trust could require that eligibility to receive any distributions depend on: (1) consent to (and passing) random drug tests; (2) notification to the trustee of any traffic citation for driving under the influence or any other criminal conviction in which the beneficiary’s alcohol or drug use is admissible concerning the charge against him or her; distributions could be limited to a stated percentage of earned income; and/or (3) no distributions could be made unless the beneficiary is drug-free and gainfully employed for a period of at least two years before the first distribution. Although such trusts can work in some instances to provide a degree of incentive, it is questionable whether money, even substantial amounts, would be successful in modifying the behavior of an individual addicted to drugs. Nevertheless, for parents unwilling to fund a drug habit or other destructive lifestyle, an incentive trust is an alternative to simply "disinheriting" the child altogether. There is always the potential for rehabilitation.

Other individuals may be concerned that their children may be overly generous with regard to making charitable gifts of family "trust money" to "fringe" religious groups or social causes that the parents do not wish to support. According, the trust provisions could tailored to provide the trustee with discretion to make distributions (in excess of the safety net distributions for basic care) only for certain stated purposes, such as helping a beneficiary to start a business by providing initial capital if the trustee approves the business plan, or a trust that provides money to assist a mother to stay home with her children. To foster financial independence it is important to structure the incentive so that the beneficiaries are motivated to succeed on their own. For example, a trust could provide for a distribution for a down payment on a home, but only if the beneficiary could otherwise qualify for the mortgage. Similarly, a trust could provide for funding of a new business, but have the distribution contingent upon the beneficiary also arranging for financing or investment from other sources.

It is also most important to maintain flexibility for the future. Accordingly, the grantor may consider simply specifying the general behaviors to be encouraged and leaving the specifics to the trustee’s discretion. Finally, the incentive trust should also include a mechanism to protect beneficiaries from an unsatisfactory trust by permitting a stated percentage or unanimous consent to remove the trustee and appoint an independent trustee such as a bank trust department or professional fiduciary as successor trustees.
How about estate planning for pets

With the enactment of ORS 114.215(3), Oregon has taken a unique approach to providing for the care of a pet upon the death of its owner. Recognizing that the death of an owner can place a pet in immediate jeopardy, this statute effectively removes animals from the probate process so they may be promptly placed under the care of a new guardian. ORS 114.215(3) permits any of the decedent’s family members or friends, or any animal shelter, to immediately take custody of a pet on the death of the owner and entitles them to reimbursement from the decedent’s estate for the cost of caring for the pet. Thus, a concerned friend, family member, or animal shelter may intervene to protect a pet even when the decedent failed to make any provisions for the pet under his or her will.

Effective January 1, 2002, Oregon became one of the first states to permit a pet to be named beneficiary of a trust. This bill creates new provisions that allow any person to establish a pet trust for the care of designated domestic or pet animals. Historically, pet trusts have been ruled invalid for two reasons: (1) there was no human beneficiary identified such that the trust was enforceable, and (2) pet trusts violate the so-called "rule against perpetuities," which requires a human life in being against which to measure the duration of the trust (obviously, an animal’s life could not be used as the measuring life)(note – Oregon’s adoption of the Uniform Rule Against Perpetuities provides for an alternative 90-year period).

The new Oregon statutes permit individual, named animals (or a class of animals) to be the beneficiary (ies) of a trust, but any animal to be provided for must be alive at the time of the decedent’s death. If the trust instrument does not designate a trustee, the court may appoint one. The person appointed may be paid from the assets of the trust. The court can also order the property to be transferred to someone other than the designated or successor trustee if such transfer is necessary to satisfy the trustor’s intent. A pet trust terminates as provide by the terms of the trust or at such time as no living animal covered by the trust is still surviving or when all trust assets are exhausted, whichever comes first. Upon termination of a pet trust, the trustee must transfer the remaining trust property in the following order: (1) as directed by the trust instrument; (2) under the residuary clause in the trustor’s will; or (3) if neither (1) or (2) apply, to those persons entitled to receive the testator’s estate under the laws governing intestate succession.

The Internal Revenue Service (IRS) still refuses to recognize the validity of pet trusts or allow an estate or income tax deduction for the bequest of a remainder interest to charity when the present interest is reserved for the care of a pet during its lifetime. Generally speaking, the IRS considers pet trusts to be void from inception (except of course, whenever such a trust is valid under applicable state law, the income of the pet trust is taxable).

One other option is for the owner to directly bequeath the animal to a veterinarian or animal shelter along with adequate funds for its care. This approach offers the advantage of a high degree of reliability – the pet is virtually guaranteed to receive the desired ongoing care. The Oregon Humane Society has such a program, called Friends Forever, which guarantees that the organization will take care of your pet after your death and place the pet in a caring home. A somewhat similar approach would be to make an outright gift of the pet to a friend or family member along with a conditional gift of funds that is dependent on the proper care of the pet. The problem of course with this approach is how could anyone enforce the terms of the bequest?

Probably the most reliable and effective method of providing for the lifetime care of a surviving pet is to create a trust with a human beneficiary in which the trustee is instructed to make distributions to the beneficiary only so long as the beneficiary properly provides for the care of the trustor’s surviving pet. In this case, there is a human beneficiary who can enforce the trust and thus, any potential legal problems associated with a "direct pet trust" are avoided. However, this type of trust requires special attention to certain considerations. First, the trustor should carefully consider his or her selection of the beneficiary (that is, the caretaker of the pet) and trustee based on ability, compatibility, and likely devotion to the long-term care of the pet. The trustee and the caretaker do not have to be the same person. In addition, the trustor should nominate alternate beneficiaries (caretakers) and trustees in the event that any one of these people becomes unable to serve during the pet’s lifetime. The trust agreement should describe with specificity the desired standard of care to be provided for the pet. Provisions requiring periodic visits or "surprise" inspections by the trustee can also help to ensure these standards continue to be met. Similarly, the trustor should carefully consider the amount of property necessary to fund the trust to be used for the care of the pet. In addition, to be complete, the trust agreement should provide instructions for the disposition of the pet at the end of its life. Finally, there must be a "fail proof" identification method provided for under the trust agreement to avoid any potential risk of fraud. There have been cases where the caretaker simply replaced the "black cat" with a series of look-alike successors to continue receiving funds for its care.
How do I establish a trust for a handicapped child with special needs without jeopardizing governmental aid?

A trust is usually the best way to manage property transferred to a handicapped child since the trustee can be given the discretion and flexibility to deal with the child’s special problems and needs. One frequently expressed concern of the parents is whether the assets of the trust established for the benefit of a handicapped child may be depleted in whole or in substantial part by the state to meet the child’s support costs or whether the trust assets or distributions will disqualify the child from continuing to receive other types of state or federal aid. As a result, any trust for a handicapped child must be designed with these special considerations in mind.

The two most important factors in establishing a trust for a handicapped child are the selection of the trustee and granting the trustee sufficiently broad discretion to enable the trustee to meet the special problems that are associated with such a child’s care. In some cases, an individual trustee may be appropriate - - in others, there will be an individual trustee and a co-institutional trustee. Careful consideration must be given to the trust language with respect to the powers of the trustee to distribute or retain income and principal. Generally speaking, the courts (at the request of the state agency) are more likely to compel a trustee to repay or reimburse the state where the trustee is directed to distribute either income or principal whether at specified intervals or if directed to pay income or principal for the child’s "health," "maintenance," or "support." By comparison courts are far less willing to compel a trustee to exercise a broad discretion for any distributions, especially in the case where the grantor has specifically directed the trustee to not distribute any sums that would disqualify the child from any government assistance or to pay for any assistance that would otherwise be provided without cost by a state or federal program. These trusts are often referred to as "supplemental" needs trusts since the trustee is only authorized to make distributions that do not jeopardize the continued receipt or eligibility for state or federal aid.

Another important consideration is whether the trust should be designed to only benefit the particular handicapped child. Generally speaking, a state’s ability to attach trust assets is far stronger if the trust is established solely for the benefit of the handicapped child. If the trustee is authorized to distribute trust assets to other beneficiaries, the state cannot usually insist that such distributions be paid only to or for the benefit of the handicapped child.

Another consideration to keep in mind is that the needs of a handicapped child can change more often than those of ordinary beneficiaries. Thus, a trust for a handicapped child should require the trustee or some other person to make regular, frequent evaluations of the child’s care and needs, including a visiting any facility where such child may reside. Further the trustee should also be required to consult with the relevant state and federal agencies not less than annually to determine whether the child is receiving the fullest possible assistance and that the trustee’s actions do not disqualify or limit the child’s ability to receive such aid. Often a family member will be the best choice for the person to perform these special responsibilities.
I want to make disproportionate gifts to my children under my will. Can I include a "no-contest" provision in my will such that any child bringing a contest will have their inheritance reduced or eliminated?

Yes. With certain exceptions, a "no-contest" clause in a will is valid and will be enforceable. Under Oregon law, if a devisee contests a will that contains a "no-contest" clause that applies to him or her, the court must enforce the clause against the devisee even though the devisee can establish that there was probable cause for the contest. However, the court cannot enforce a "no-contest clause if:

(a) The devisee contesting the will can establish that he or she has probable cause to believe the will was forged or revoked; or

(b) The will contest was initiated by a fiduciary acting on behalf of a protected person (e.g., in a conservatorship), or by a guardian ad litem appointed for a minor, an incapacitated person or a financially incapable person.
Our mother died about ten years ago. It was my understanding that my father’s existing will left his property in equal shares to me and my sister. Then, for about a year before my father died he lived with his lady friend and her family. Now, it turns out my father’s friend took him to an attorney who drafted a new will leaving his entire estate to her. Can I contest my father’s will on the grounds of "undue influence?"

Perhaps, depending on the facts and circumstances. Oregon case law adopts the general principle that the law will not permit improper influence to control the disposition of a person’s property. Although the term "undue influence" cannot be specifically defined, the theory is that the testator is induced by various means to execute a will that in reality, is not his or her will, but rather the "will" of another person which is substituted for that of the testator.

Experts believe that there are certain predisposing factors that can lead to undue influence by making the person more susceptible. These include the death of a spouse (especially where they were dependent on the deceased spouse for key decisions); depression; isolation; a need for social attention; anxiousness; dependency on others for physical assistance; diminished mental capacity whether from age or illness and undetected illnesses such as where an elderly person living alone may be in the early stages of Alzheimer’s.

There are also certain situations where a person becomes more "vulnerable" such that he or she is more susceptible to being taken advantage of. Such situations often include increasing dependency needs such that a devious person may find it relatively easy to take advantage of the vulnerable person through providing or withholding medications and food. A manipulative person may also undermine a vulnerable person’s relationship with family members or caring friends by telling lies or withholding information (such as not telling the person that your daughter called to check on you today). Other common ways to increase vulnerability include restricting access to the elderly or ill person by friends and family or even engaging in deceptive manipulations where the person may be confused or be failing mentally. Thus actions such as these done to enhance the vulnerability of the susceptible person can foster his or her trust of or reliance upon the person doing the manipulation.

The burden of proof of undue influence is on the person contesting the will. Generally the personal representative has the burden of proving the undue influence, which can be met by establishing: (1) the existence of a confidential relationship between the "beneficiary" and the decedent; (2) the beneficiary’s dominance over the decedent, and (3) the presence of suspicious circumstances surrounding the execution of the will. The burden then shifts to the "beneficiary" to prove that improper influence was not used. This influence must exist at the time the will is executed.

Courts in Oregon have established a number of guidelines for suspicious circumstances to resolve the question of when a will has been executed as a result of undue influence:

(a) The person alleged to have exerted undue influence participates in preparing the will;

(b) Lack of independent, disinterested advice (a beneficiary who participates in preparing the will and has a confidential relationship with the testator) has a duty to see that he or she receives independent, disinterested advice;

(c) Secrecy and haste in preparing the will or the fact that the will is being kept from family member who might other wise have been the natural objects of the testator’s bounty;

(d) A change in the testator’s attitude or plan or disposing his/her property following close association with the "beneficiary;" unexplained changes from previous wills or "intestate" succession rules;

(e) An unnatural or unjust gift to the "beneficiary" compared to those who would otherwise be expected to inherit such property;

(f) Susceptibility to influence due to physical illness; being emotionally or mentally confused; or where the testator becomes dependent on the "beneficiary" for care, medicine, etc.

By way of illustration, the following factual pattern was held by the court to establish undue influence by the testator’s friend, thus the will was declared null and void. The court considered the following evidence. The friend moved in with the testator less than a year before the testator died, and bathed her, gave her medication, shopped for her, wrote her checks, and drove her on errands, etc. These actions established a "confidential relationship" to the testator. The friend urged testator to make a new will and made an appointment with an attorney, who was previously unknown to testator. No notice of the new will was given to the testator’s family members or close friends. The testator had made two wills within the 10 months before making this will, both of which left testator’s entire estate to her daughters. In this case, the testator’s new will provided for her entire estate to go to the "friend" and disinherited her daughters. Finally, the testator was ill and susceptible to influence.
It was my understanding that my mother’s will left her estate in equal shares among the three children. About six months before she died of Alzheimer’s my mother executed a new will leaving everything to my brother. Can my sister and I contest my mother’s will on the grounds that she lacked testamentary capacity?

Perhaps, depending on her capacity at the time the new will was executed. Under Oregon law, mental competency to make a will is determined at the exact moment the will is executed. Therefore, the testimony of the attesting witnesses and any other disinterested persons present at the time of execution will be given great weight. Nevertheless, testimony from the decedent’s doctor and/or nursing home personnel can outweigh testimony regarding capacity from attesting witnesses who either had little opportunity to observe the decedent or were "interested" parties. There is a legal "presumption" that a person who properly executes his or her will was competent. Thus the burden of proof shifts to the party contesting the will.

The requirements for testamentary capacity include:

(1) The person must be able to understand the act in which he or she is engaged (that is, execution of his or her will);

(2) The person must know the nature and extent of his or her property;

(3) The person must know, without prompting, the claims, if any, of those who are, should be, or might be the natural objects of the person’s bounty; and

(4) The person must know and understand the scope and reach of the will provisions.

Cases in Oregon have held that only a relatively minimal level of mental competency is sufficient to execute a will. For example, a will was upheld despite evidence that the testator had filthy living habits; his farm was in disrepair; animals had died from neglect and rotted on his farm; his house was filthy; he slept in his clothes and wore rain gear and rubber boots continuously. Likewise, a will was upheld where the testator was 94 years old, blind, failing physically, lived in a nursing home, and afflicted with a "chronic brain syndrome."

The rule that testamentary capacity is determined at the time the will is executed is also important. For example, a person determined to be mentally ill or insane can make a will during a lucid interval. Similarly, a person can be determined to be incompetent and require a guardian, but nevertheless, be held by the court to have testamentary capacity. Thus, a testator is not required to have had a high degree of "mentality" at the time the will is executed and one may have testamentary capacity even if mentally incompetent to execute contracts, deeds or other bilateral engagements.
I want to make gifts to my grandchildren without incurring the expense of setting up a trust by using a Uniform Transfer (Gift) to Minors custodial account but understand that the child automatically gets the money at age 21. Is there any way to defer the final distribution until a grandchild is older?

Yes, Custodial accounts can be established to hold outright gifts to a minor, taking advantage of the annual gift tax exclusion now $12,000 per donee per year. The Oregon Uniform Transfers to Minors Act (the "UTMA") provides a way for a minor to own assets through a custodial account without the expense of establishing a trust. The donor must appoint an adult or trust company as trust custodian. The account is somewhat similar to a trust but it is governed by the UTMA (ORS 126.805 through 126.886). Oregon statutes enacted by the 2001 legislature (effective January 1, 2002) also increase the amount that may be transferred to a custodian for the benefit of a minor without court approval from $10,000 to $30,000. More importantly, the new statutes authorize the creation of custodial accounts that last until the beneficiary reaches the stated age of up to 25 (rather than 21). This change should appeal to anyone who wishes to ensure that children or grandchildren do not receive an outright distribution of the entire account balance at age 21 but want to take advantage of the simplicity and low cost of using a custodial account. This is done as follows: "As custodian for ___________________(name of minor) under the Oregon Uniform Transfers to Minors Act until the minor attains the age of 25 years."
My wife and I own several properties in Oregon that have appreciated a great deal in value over the years. Assuming we hold on to the properties until death, we have been told that only one-half of the appreciation will go untaxed. Can you explain?

(a) Current Law. Under IRC §1014 (stepped-up basis rules), the income tax basis of property acquired from a decedent at death generally is stepped up (or stepped down) to equal its value as of the date of the decedent’s death (or six months later if alternate valuation is elected on the Form 706 – the estate tax return). Thus in the typical situation where property acquired from a decedent had increased in value during the decedent’s life, this basis rule will allow the recipient of the property to completely avoid income tax on any of the gain that occurred during the decedent’s lifetime. This current basis rule for purposes of income tax is especially significant in situations, such as yours, where the properties have significant appreciation.

This stepped-up basis rule applicable for property acquired from a decedent is in sharp contrast to the "carry-over" basis rule for lifetime gifts of property. Under the carryover basis rule, the basis of property transferred by a donor to another person (the recipient) becomes the basis of such property in the hands of the recipient.

If you or your wife were to own the properties individually, upon the death of the "first" spouse, the appreciation in such properties would pass "income tax-fee" to his or her heirs under the step-up in basis rules. Whether this income tax result outweighs the potential savings in estate tax from making lifetime gifts depends on the size of the taxable estate. However, as a general rule, clients with a taxable estate will benefit from making lifetime gifts to remove the value of such assets from their taxable estate since the current estate tax rates or at least double the capital gains rates. The unknown factor of course, is when and if the federal estate tax (and state inheritance tax) will be repealed. Further, there are "modified" carry-over basis rules applicable to estates of decedents dying after 12-31-2009, but again, it is not entirely clear that these new basis laws will actually go into effect. History suggests that they will be repealed before taking effect. A prior change to the date-of-death "stepped-up" basis rules was rescinded before going into effect due to difficulties and costs of actually administering the "carry-over basis" changes.

(b) New Carryover Basis Rules – 2010. Beginning in 2010 (unless the law is repealed or modified), the stepped-up basis at death rules will be repealed and replaced with the modified carryover basis at death rules. Thus, effective for property acquired from a decedent dying after 12-31-2009, the income tax basis of property acquired from a decedent will generally be carried over from the decedent (subject to the specified exceptions noted below). More specifically, the recipient of the property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent’s death.

However, there are two significant exceptions - - as a partial replacement for the repealed basis step-up, personal representatives will be able to partially increase the basis of estate property by up to $1.3 million or $3 million in the case of property passing to a surviving spouse. First, the personal representative generally can step up the basis of assets of his/her choosing by a total of $1.3 million (called the "general basis increase"). The basis step-up available under the general basis increase provision can be allocated to assets passing to any property recipient. This limit can be further increased by the amount of any unused capital losses, net operating losses, and certain other losses under IRC §165. Second, for assets passing to the decedent’s surviving spouse, an additional $3 million in basis step-up is available (called "spousal property basis increase"). Both the $1.3 million and the $3 million spousal property basis increase can be applied to property passing to a surviving spouse. Thus up to $4.3 million in date-of-death basis step-up can be allocated to property received by a surviving spouse. In order for spousal property basis increase treatment to be available, the property transferred must be "qualified spousal property." To be classified as "qualified spousal property," the transferred property must be either "outright transfer property" (any interest in property acquired from a decedent by the decedent’s surviving spouse) or "qualified terminable interest property" (QTIP property).

For purposes of these modified carryover basis rules, the decedent will be deemed to own 50% of property held by the decedent and his or her surviving spouse as joint tenants with the right of survivorship. Further, the decedent will be treated as owning property that he or she transferred during lifetime to a revocable trust. For community property, if under the community property laws of any state, property representing the surviving spouse’s one-half share of property is held as community property by the decedent and the surviving spouse, this property will be treated as owned by, and acquired from, the decedent. Further, community property will still be subject to the pre 2001 Act rules. Thus, if otherwise available, the surviving spouse will be able to get a step-up in basis in the interest "owned" by the surviving spouse as well as what was owned by the decedent, subject to the overall amount limitations.

Certain property will not be eligible for the step-up in basis including property that was acquired by the decedent by gift or inter vivos (lifetime) transfer (other than from a spouse) during the three-year period ending on the date of the decedent’s death and property that constitutes the right to so-called income in respect of a decedent.

Thus, assuming these rules for carryover basis actually go into effect after 12-31-2009 (subject to the $1.3 million and $3.0 million step-up as discussed above) there will be no difference in the income tax consequences to the non-charitable recipients of an estate in excess of $4.3 million whether the property is received by gift or by inheritance.
My brother lives in Vancouver, Washington and tells me the community property laws permit a "step-up" basis for all community property (not just one-half as in the case of jointly-held property in Oregon) upon death of either spouse. Should my wife and I become residents of Washington or some other community property state to take advantage of this law?

(a) Creation of Community Property. IRC §1014(b)(6) currently permits a so-called "double basis" adjustment for community property. In other words, for community property held by the decedent and the surviving spouse, not only does the decedent’s one-half of the community property receive a stepped-up basis but the surviving spouse’s one-half does as well.

Thus, unless and until the federal estate tax is repealed (assuming the above modified carry-over basis rules will take effect 12-31-2009, you should consider converting that portion of your property (in excess of $4.3 million) to community property to "achieve" the same level of income tax planning. To do so, one option is to become domiciled in a community property state such as Washington. If this course of action is not viable or desirable, there is another option under Alaska law.

Basically, a married couple domiciled in any state can establish an Alaska "community property trust"" and by transferring property to the trust, make that property community property under Alaska law. An essential element of the trust is that at least one trustee must be a "qualified person" defined a either a resident (individual) of Alaska or a trust company or bank that has its principal place of business in Alaska. Although arguments can be made either way, the general recommendation is to NOT hold real property directly in such a trust (since state laws generally dictate that real property is governed by the law of its situs) but rather contribute it to a limited liability company (LLC) or family limited partnership ("FLP") thereby converting it to personal property and have the trust hold the LLC or FLP interests.

There will be "set-up" fees for the trust by the required trustee in Alaska as well as on-going annual fees for trustee management or administrative services where the trust agreement authorizes and directs that investment management responsibilities have been delegated to someone other than the Alaska trustee.
How can I "leverage" the use of the annual and lifetime exclusions from gift tax to minimize my estate taxes?

(a) Use of a GRAT. Until the estate tax is finally repealed, grantor retained annuity trusts ("GRATs") will continue to be a useful estate planning technique to leverage giving. A GRAT is an irrevocable trust in which the grantor retains the right to receive an annuity for a fixed term, at which time the remaining trust assets pass to the remaindermen, or to trust for their benefit, without any further gift tax implications. The amount of the gift (the remainder interest under the trust) is calculated at the time the trust is set up and consists of the amount the grantor contributes to the trust less the actuarial value of the retained annuity payments. The annuity payments are "qualified interests" pursuant to IRC § 2702(b) so that the value of the gift is reduced by the present value of those payments. For maximum leverage, the GRAT is usually structured so that the value of the gift is as close to zero as possible (commonly referred to as a zeroed-out GRAT). Assuming that the trust assets are a successful investment, the amount remaining in the trust when the annuity payments are completed will be substantially greater than the remainder that was initially calculated. In other words, the appreciation in the trust assets will pass to the beneficiaries as part of the "remainder." On the other hand, if the assets used to fund the trust generate less income than the income payout selected, some portion of the trust’s principal will have to be invaded, and (ignoring appreciation), the beneficiaries will receive less than the full amount of the initial gift. However, because the gift was completed when the trust was set up, no additional gift tax is imposed on the additional assets that pass to the trust beneficiaries. One technique used to address this problem is to "back-end load" the GRAT such that the annuity payments are lower in the initial years, then increase over time.

GRATs can work especially well with interests in closely held (family) entities because of the availability of valuation discounts for minority interest and lack of marketability. These discounts thus decrease the gift tax valuation of the assets used to fund the GRAT, but do not decrease the cash flow from the trust assets.

If the grantor dies during the term of the GRAT, his or her gross taxable estate includes only the lesser of the GRAT’s remaining principal or that amount of principal required to provide the specified annuity at the date of death. In other words, if the grantor outlives the term of the trust - - there are significant gift and estate tax benefits due to the leveraging. However, if the grantor should die before the end of the specified term there is no downside in the way of additional estate tax. Nevertheless, to make sure the desired tax planning is achieved; GRATs are often structured for relatively short terms (assuming the trust otherwise has funds to pay the required annuity amount).

One downside from a GRAT is that the remainder beneficiaries will not receive a step-up in basis on the assets they receive under the GRAT as they would (under current law) in the case of "inherited" assets. However, as a general rule, for taxable estates, the higher estate tax rate will mean removing assets from the grantor’s taxable estate will be more advantageous than the potential income tax savings due to the application of the stepped–up basis rules.

As discussed above, assuming the modified carry-over basis rules do go into effect at 1-1-2010, and, assuming further, the estate tax is repealed on schedule, taxpayers with a "long" life expectancy may only want to consider a GRAT for those assets in excess of $4.3 million.

(b) Sales to Intentionally Defective Grantor Trusts. As an alternative to a gift to a GRAT, a transaction can instead be structured as an installment sale to an intentionally defective grantor trust ("IDGT"). Basically, the grantor sells an asset to an IDGT he/she created in return for a note equal in value to the value of the assets sold. This type of transaction provides many of the same benefits as a gift to a GRAT, but also has a few advantages. As with a GRAT, this technique is generally appropriate when the client wants to freeze the value of an asset his or her estate and believes the asset will appreciate substantially in value in the future. Similarly to a GRAT, this technique if most effective when the rate of return on the asset transferred exceeds the rate of interest the grantor will be required to charge of the note.

If a grantor transfers a minority interest in commercial real estate or othe