/24-7/ -- When an individual dies, his or her estate has to be administered, debts settled and assets distributed. Often these duties fall to a fiduciary such as an attorney, a trustee, a personal representative, an administrator or an executor. In the context of wills and trusts, a fiduciary holds a position of trust and is responsible for holding and managing property that belongs to the beneficiaries.
Fiduciaries have certain legal obligations to the estate's beneficiaries, including a duty of care and duty of loyalty. If a fiduciary violates these duties, he or she may face civil or disciplinary action. If you are a beneficiary of a trust or will, you should know what obligations a fiduciary owes you and what constitutes breaches of those duties under Michigan law.
If a will appoints a personal representative, that personal representative has a fiduciary obligation to the decedent's devisees (often referred to as beneficiaries). The personal representative's basic duties are to distribute the assets and pay any debts. Often, the personal representative will open a checking account in the name of the estate to better effectuate distributions and payments, as well as to keep an accurate accounting record. The personal representative has to assess the fair market value of the assets in case of an estate sale. Also, the personal representative should file any required tax returns on behalf of the estate.
Personal representatives must maintain reasonable communication with the beneficiaries regarding estate issues. If the personal representative mismanages the estate through failure to timely settle debts, self-dealing or failure to assess and receive fair market value for estate assets, the beneficiaries may be able to have a court legally discharge the personal representative and go after the personal representative's personal assets to cover any losses to the estate's value.
In the cases of trusts, trustees must manage the trust assets according to the trust's terms and for the benefit of the beneficiaries. A trustee owes the duties of loyalty and impartiality to all beneficiaries. An individual or a trust company can act as trustee, and the fiduciary obligations may vary depending upon the size and extent of the estate. Trust assets may be tangible property, financial holdings or real estate, but just as in the case of an estate executor, the trustee is obligated to assess the overall value of these assets. Usually, the trustee obtains a tax identification number for the estate and files the requisite tax returns.
The trust administrator must also make prudent investments with trust funds to avoid loss and increase income to cover expenses and taxes. Whereas the execution of an estate may continue for a certain length of time, trust administration may be terminated based on a specified termination date or when a beneficiary reaches a certain age. During the tenure of the trust, the trustee must provide an annual income statement (Schedule K-1) to each beneficiary who receives taxable income from the trust. Also, each beneficiary is due a trust accounting. If the trustee neglects any of his prescribed duties, or causes a loss of trust value, he or she may be liable for breach of fiduciary duties. The trust beneficiaries can attempt to hold the trustee liable and go after his or her personal assets to satisfy any loss.
Attorneys are subject to codes of ethics and professional conduct, and if they violate these codes, they may face disciplinary actions, including possible disbarment. Generally speaking, estate planning attorneys must be reasonably competent enough to handle entrusted legal matters such as drafting testamentary and estate documents (including wills and trusts) and providing the requisite preparedness and administration to carry out the goals of their clients as well as to protect the rights of the beneficiaries. Falling short of these minimum competencies may amount to malpractice. Estate attorneys are obligated to keep the estate assets safe.
Additionally, in most cases, an estate lawyer has to divulge any conflict of interest that adversely affects the beneficiary, particularly if the attorney will receive any gifts or remunerations under the decedent's instrument. Fraud or other illegal acts such as commingling estate assets with the attorney's own assets amount to misconduct which can subject the attorney to disbarment. A beneficiary can request an accounting of assets and how these assets are to be distributed. If the beneficiary believes that the attorney has violated any professional or ethical code, he or she can generally file an ethics complaint against the attorney. In addition, it may be possible to sue the attorney for legal malpractice.
Article provided by the Prince Law Firm. Please visit us at www.probateprince.com.
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Tuesday, January 20, 2009
Fiduciary Obligations Related to Estate Planning and Administration
Monday, January 19, 2009
History and Overview of the Federal Estate Tax
/24-7/ -- The federal estate tax is defined by the Internal Revenue Service as a tax on the right to transfer property at death. The tax is imposed on the taxable estate, which is the total fair market value of the property transferred at death (called the gross estate) minus allowable deductions. Deductions allowed under the Internal Revenue Code include administration expenses, funeral expenses, charitable transfers and property that will be passed on to a surviving spouse.
History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a specific purpose. For example, the first version of the estate tax was enacted by Congress in 1797 to fund the formation of the American Navy. The Revenue Act of 1862 enacted an inheritance tax and introduced a gift tax for the first time in order to fund the Civil War effort. The War Revenue Act of 1898 implemented an inheritance tax of .74%.to 15%, which was used to fund the Spanish-American War.
The Revenue Act of 1916 assessed taxes on estates based on their value as of the date of death. An exemption of $50,000 was allowed. Rates ranged from 1% for estates with a net value below $50,000 to 10% for estates over $5,000,000. These rates were increased in 1917 to 2% for estates valued at less than $50,000 and 25% for estates over $10,000,000. The Revenue Act of 1918 cut the rates on estates valued below $1,000,000 and expanded the estate tax base by including life insurance proceeds and the value of the surviving spouse's interest in the estate above $40,000 of the estate's value.
The Revenue Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and added a gift tax. The gift tax was repealed in 1926 and the estate tax rate was lowered to 1% for estates below $50,000 and set at 20% for estates over $10,000,000. Between 1932 and 1942, estate and gift taxes were increased several times and exemption amounts were lowered. Estate tax rates were at their highest rate in 1941 - 77% for estates over $50,000,000.
The Tax Reform Act of 1976 brought sweeping changes to the estate and gift tax laws. The reform included a generation-skipping tax. The three separate taxes became part of a unified system for the first time. Estate and gift taxes were capped at 70% for estates over $5,000,000.
The Economic Recovery Act of 1981 phased in an increase in the unified tax transfer credit from $47,000 to $192,000 and a decrease in the maximum tax rate from 70% to 50%. The limits on estate and gift tax marital deductions were eliminated. The Taxpayer Protection Act of 1997 phased in an increase in the amount excluded from taxes from $600,000 in 1997 to $1,000,000 in 2006.
Current Law
The current estate taxes are nearing the end of the phased changes set forth in the Economic Growth and Tax Relief Reconciliation Act of 2001 ("2001 Act"). The 2001 Act gradually reduced the maximum estate tax rates from 50% in 2002, to the current rate of 45%, where it will remain through 2009. The amounts exempt from estate taxes increased from $1,000,000 in 2002 to $2,000,000 for 2008. This amount increases to $3,500,000 for 2009. The 2001 Act repeals the federal estate tax in 2010. Unless Congress acts to extend the tax relief offered by the 2001 Act, the rates will return to pre-2001 Act levels in 2011.
The history of federal estate taxes indicates that the U.S. government has used estate taxes as a source of revenue during tough economic times and war. With the war in Iraq draining resources and the current economic recession, it seems possible that Congress will not extend the estate tax relief provided in the 2001 Act.
Article provided by the Prince Law Firm. Please visit us at www.probateprince.com.
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