Frequently Asked Questions

General Planning Considerations
  • Q: What is estate planning?
    • Estate planning provides tools for conserving and distributing an individual’s assets in a coherent and tax-efficient manner. A complete plan allows you to control your property while you are alive, take care of you and your loved ones if you become incapacitated, and when the time comes, distribute what you have to whom you want, when you want. In addition, it allows you to save every tax dollar, professional fee and court cost legally possible.
  • Q: How much is the Vermont estate tax?
    • A Vermont estate tax rate of 16 percent applies to the portion of a Vermont resident's estate that exceeds $2.75 million (as of 2018).
  • Q: What is the difference between a power of attorney and an executor?
    • Literally, a lifetime of difference. Powers of attorney of all sorts are effective only during the principal’s lifetime, whereas an executor’s powers come into being only after the death of the principal.
    • Powers of attorney are documents whereby an individual (the principal) authorizes someone else (the agent) to act on the principal’s behalf. This could entail the agent’s signing papers to bind the principal to a contract, engaging in financial transactions on behalf of the principal, or in the case of an Advance Directive, declaring what medical treatment the principal would want, or not want, if the principal is unconscious or otherwise unable to communicate their medical wishes. Powers of attorney are important documents that can be invaluable if the principal is injured or falls ill. However, because many powers of attorney for finances are very broad, it is essential that the principal pick as an agent only someone that they have absolute trust in. Even though the agent has fiduciary obligations to the principal, a broad power of attorney in the wrong hands can cause all sorts of problems.
    • An executor is someone you name in your will to manage your probate estate. Because a will does not take effect until your death and your choice of executor must be approved by the Probate Court, an executor does not have any authority to act until after the probate process has been initiated. Choosing an executor, much like an agent, is an important issue. Executor’s should be detailed, fair-minded and conscientious, and someone who will carry out your instructions in your will as precisely as possible.
  • Q: In Vermont, if someone dies without a will, is probate necessary?
    • Whether probate is necessary depends on whether there are any probate assets. If all of a deceased person’s assets pass to a surviving spouse or someone else because the assets were jointly owned, then probate may not be necessary. Also, if a person had a trust and all of the deceased person’s assets were in the trust, then probate may not be necessary.
    • Most often, when a person does not have a will or a trust probate becomes necessary to ensure that creditors have an opportunity to ensure the deceased person’s legitimate debts are paid off, and to transfer title of real property and titled assets to the deceased person’s survivors. Vermont’s intestacy laws determine, in the absence of a will, how the deceased person’s assets will pass to the survivors.
  • Q: Does a person in their 20s or 30s need estate planning?
    • There are levels of estate planning applicable to every age.  While many people in their 20s and 30s do not need an elaborate estate plan, they should complete a few basic documents.  The most important documents for this age focus on planning for accidents or illness, and include an Advance Directive for Health Care, which allows someone to make medical decisions on your behalf and provides guidance as to the types of medical care you want and don't want; a General Durable Power of Attorney for Finances, which allows someone to make financial decisions for you; and a HIPAA Release, which allows hospitals and medical institutions to release your medical information to family members or others.  Additionally, if you have a family of your own, a basic will is advised so that you can name who would raise your children in the event you and your spouse were severely injured or killed.  Planning doesn't have to be complicated, but life tends to get very complicated when no planning is involved.
  • Q: Can a grandparent pay for a grandchild's private school?
    • Grandparents may pay for the education expenses of a grandchild without any adverse tax consequences, provided the payments are made directly to the school and are considered by the IRS to be a qualifying education expense. Qualifying educational expenses include tuition for full-time or part-time students, but do not include payments for books, supplies, dormitory or boarding fees, or similar costs not directly related to tuition.
  • Q: Do the provisions of a will override a beneficiary designation?
    • No, rather a beneficiary designation overrides the provisions in your will. The reason is that your beneficiary designations form part of a contract that you have with the financial institution managing the account, and contractual provisions overrule language included in a will. For this reason, it is advisable to check every couple years to ensure all of the beneficiary designations on your financial accounts, including retirement accounts and life insurance policies, are up to date and reflect your current wishes. Also, if you are recently divorced or widowed, update your beneficiary designations immediately. It frequently happens that former spouses receive life insurance proceeds, to the dismay of current spouses.
  • Q: What is the marital deduction
    • The marital deduction allows for unlimited lifetime gifts between spouses, and for unlimited transfer of assets from a decedent to their surviving spouse. The deduction, equal to the value of the assets transferred, applies as a deduction against gifts in the calendar year when occurring between living spouses, or as a deduction against the deceased person’s gross estate for estate tax purposes.
    • For gifts between spouses, if the recipient spouse of a gift is not a U.S. citizen at the time of the gift, the deduction is limited to $100,000. For estate taxes, if the surviving spouse is not a U.S. citizen, the deduction is also limited, but the limitation can be circumvented through use of a qualified domestic trust set up before the death of the first spouse.
    • The marital deduction is an important estate planning option that is frequently used to rebalance estates between spouses, and to delay estate taxes until the death of the second spouse so that the surviving spouse’s standard of living is not substantially reduced.
  • Q: Can you protect your children's inheritance if you die first and your spouse remarries?
    • Yes, but you have to avoid simplistic estate planning that leaves everything to your spouse if you die first. Most basic wills leave everything to one’s surviving spouse, who may decide how all the family assets are distributed upon their death, because they own everything. Instead of leaving everything to your spouse, you can leave your share of the family assets to your children in trust, but give your spouse limited access to the assets in trust for the remainder of his or her life. That way your spouse has access to the assets so that their standard of living can be maintained, but upon your spouse’s death, the assets pass to your children. This is a common planning scenario where blended families are involved. Blended families exist where one or both spouses has children from a prior marriage.
  • Q: How can I ensure my children receive an inheritance if I die and my spouse remarries?
    • You can accomplish this through a will or a trust. If through a will, you simply name your children as beneficiaries. Keep in mind that your spouse has a right to what’s known as an “elective share” whereby they can inherit a portion of your estate regardless of what the will states. One problem with the will approach is that if you leave a sizable portion of your estate to your children, your spouse might need to scale back their standard of living. For this reason, many people opt for a trust that is structured so that the surviving spouse has limited access to the deceased spouse’s assets for the remainder of the surviving spouse’s life, but upon the death of the surviving spouse, the assets pass to the first decedent’s children. By creating the trust structure, you are allowing your spouse to maintain their standard of living, while ensuring that the remaining funds eventually pass to your children.
  • Q: What is a blended family, and how does a blended family affect estate planning?
    • By blended families, we mean a situation where one or both spouses have children from a prior marriage.  It's important for the estate planner to point out the potential landmines in a blended family situation, and for the married couple to plan accordingly.For instance, planning for blended families usually calls for a revocable living trust so that the first spouse to die does not inadvertently disinherit their children from the prior marriage. If the first spouse to die simply passes their assets to the surviving spouse, the surviving spouse may exclude the decedent spouse's children from their estate plan, which is usually not what the decedent spouse would have wanted. Through a revocable living trust, each spouse can ensure that all of their children will remain beneficiaries of their inheritance.
    • Other considerations include whether to limit (and to what degree) the surviving spouse's access to the decedent's assets, who to name as trustee of the various trusts, and how to protect your children's inheritance from the surviving spouse's new romance.
  • Q: What are factors to consider when estate planning for a blended family?
    • There are many factors to consider when working with a blended family because these situations have inherent conflicts built into the family relationships. The most obvious conflict is between the surviving spouse and the decedent’s children from a prior marriage. Questions to ask include:
    • How much access should the surviving spouse have to assets in the Marital and Credit Shelter trusts?
    • Should the surviving spouse be trustee, or a co-trustee, of these trusts?
    • Should all the decedent’s assets be tied up in these trusts for the lifetime of the surviving spouse, or should your children from a prior marriage receive something upon your death?
    • Do you intend to treat all of your children equally even though they come from different marriages?
    • Do you treat your stepchildren equally to your own children?
    • Should the surviving spouse have a power of appointment?
    • There are a lot of issues to go over when a blended family engages in estate planning. It’s best to consult a seasoned estate planning attorney who can point out the issues and the options available, because the conflicts can later tear a family apart if these issues are not handled well.
  • Q: Is it OK to treat my children differently in my estate plan?
    • It’s both OK and sometimes advised, but dependent entirely on one’s personal and family circumstances. The default for most parents is to treat their children equally, but situations arise where leaving money to one child already very well off doesn’t seem to make sense when other children are equally productive but in careers that simply don’t compensate as much. Factors that go into this decision include the amount of money at issue, whether a child will feel slighted if their share is unequal, and possibly whether a child simply doesn’t deserve as much as their sibling, among other issues. Talking through how you want to proceed, and the best way to accomplish your plan, is best done with an experienced estate planning attorney, who has seen these situations before.
  • Q: How do you adjust your estate plan for an ungrateful son?
    • Some parents disinherit their children with no regrets, others struggle with how to handle this uncomfortable situation. There are several options for dealing with difficult children, including making uneven distributions among your children, altering the timing of distributions, and leaving your children their inheritance in different forms, for example one child could receive their inheritance outright while another receives theirs in trust with a corporate trustee to manage it. With a trust, you could also place conditions on distributions so that the beneficiary must meet certain requirements before distributions are made from the trust. There are many options available, which your estate planning attorney can discuss with you.
  • Q: How do you cut off an alcoholic child from an inheritance?
    • It’s possible to disinherit someone entirely in a will or trust, or to condition distributions from a trust on the alcoholic beneficiary meeting certain requirements, such as sobriety, before a distribution can be made. Establishing a reliable method for determining continuous sobriety may be problematic, but if the parent can settle on language they are comfortable with, the provisions can be enforced through the use of a trust.
  • Q: What are some tips for selecting a Guardian for my children?
    • When selecting a guardian for your children, one overriding concern is to reduce the children’s stress as much as possible. With this in mind, consider a family member with a close relationship to your children so that the transition is more predictable, or a guardian that lives near your home. Consider what changes the guardian will have to make in their own lifestyle to accommodate your children. You don’t want to cause upheaval in the guardian’s household because this too causes stress that might be released in unexpected ways. For instance, you should consider a guardian who has similar-aged children of their own or someone who is economically independent so that your children will not be a financial burden. Consider a guardian who shares your core beliefs, such as religious and moral values, your philosophy on education, discipline and upbringing, even your politics. It is usually best to avoid naming a couple; instead name the husband or wife so that if the couple later separates or divorces, there will not be any dispute as to who remains the legal guardian.Also, a good rule of thumb for nearly all positions in estate planning is to name at least one backup, or alternate, in case the first person named is unable or unwilling to take on the responsibility. To avoid selecting someone who would prefer not to accept this responsibility, talk to the prospective guardian first to gauge their willingness and to share your hopes for your children.  Finally, be prepared to re-evaluate your choice every 3-5 years to ensure that your existing selection remains the best available choice in light of changing circumstances.
  • Q: What are Pet Trusts, and are they allowed in Vermont?
    • Pet trusts and related documents make arrangements for your pets in the event you become incapacitated or die.  What happens to your pet if no one is available to care for them?  Often they are put to sleep.  Pet owners frequently assume that a family member or close friend would take care of their pet, but that too often turns out to be wishful thinking.  The Humane Society of the United States estimates that 9,600 dogs and cats are euthanized in this country every day.If you want to plan ahead for the care of your pet, there are several ways to go about it.  You can have an informal agreement with a family member or friend that the person take over care and management of the pet.  Informal agreements often work, but be aware that two common situations sometimes get in the way.  First, sometimes more than one family member thinks they are getting the pet, or if the pet is valuable, such as a purebred dog or cat, a rare bird or a horse, more than one family member may seek custody.
    • More advanced planning includes naming the person who should receive your pet in your will, setting up a pet trust, or creating an agreement whereby you list who receives the pet, whether money will be provided for the pet's care, and other information relevant to the pet's proper care, such as medical conditions, favorite toys, unusual habits, etc. Pet trusts, which became available in Vermont earlier this year, allow for naming a person to care for your pet and putting aside money that can only be spent for the pet's care, which can include funds for daily expenses and activities, boarding when necessary, pet insurance and the like.
  • Q: What is the "Applicable Federal Rate"? Why is it important in estate planning?
    • The Applicable Federal Rate (AFR) refers to three rates determined by the U.S. Treasury based on debt instruments of varying maturities. The federal short-term rate applies to debt instruments with a term of three years or less; the federal mid-term rate applies to terms of more than three years, but not over nine years; and the federal long-term rate applies to terms of more than nine years.
    • The AFR comes into play in estate planning in many areas, most of which benefit from a low interest-rate environment. These include low-interest intra-family loans, installment sales of a closely held business or family limited partnership, grantor retained annuity trusts (GRAT), charitable lead annuity trusts (CLAT), private annuities, and self-cancelling installment notes (SCIN). In recent years, AFRs have been at historically low rates, making many of the above estate planning strategies worth investigating.
  • Q: Is the Gift Tax different from the Estate Tax?
    • The gift tax is separate, but recently reunited with the estate tax under the provisions of the Tax Relief Act of 2010. Unlike the estate tax, which is applied after a person's death, the gift tax is levied during a person's life. The person making the gift is known as the donor or transferor, and is responsible for paying the gift tax.  Gift tax returns are due by April 15 of the year following the calendar year when the gift was made.
    • Gift tax rules are more complicated than most people realize. To arrive at the gift tax, you take the value of the gift, subtract the annual exclusion amount if not already used for the recipient, subtract amounts passing to a spouse or charitable organization, then add in any applicable generation skipping transfer taxes payable, which results in the taxable gifts for the relevant year. The gift tax is cumulative, so the amount of gifts made in prior years is added to the current year gifts to determine the total taxable gifts. Then, figure the tax on the total taxable gifts, and the tax on the current year gifts; subtract the latter from the former, and you arrive at the gift tax for the current year. Finally, subtract the donor’s unified credit, provided the donor has some available, and you arrive at the gift tax due for that year.
    • There are important exceptions to the gift tax laws, including payments made directly to qualifying educational and medical institutions. Whenever making sizable gifts of more than $15,000 to any individual, consult an attorney or a CPA to see how best to minimize gift taxes.
  • Q: What are some creative ways to get around the Gift Tax?
    • With the reunification of the estate and gift tax rates, an individual may, under current law, give $11 million in lifetime gifts (a married couple may give $22 million) before gift taxes become due. Few people need to exceed that amount, but if you see a need to give more, or you don’t want to reduce your estate tax exemption amount, here are some opportunities in the existing gift tax laws that allow substantial tax-free gift giving to family members, friends and charitable organizations.
    • First, consider the annual gift tax exclusion amount of $15,000 per person, to any number of people you choose. Couples may give $30,000, and if a couple is making gifts to a child and spouse, the amount doubles to $60,000 per year.
    • Second, consider the gift tax exclusion for education and medical payments made directly to the provider. You can give an unlimited amount of qualified payments for tuition and medical expenses, including medical insurance.
    • Third, consider gifts to public charities or private foundations.
    • Fourth, if married, consider making gifts to your spouse. You might consider this if your property is separately owned, and one spouse’s net worth is below the Vermont or federal estate tax exemption amount, while the other spouse’s exceeds the state or federal exemption amount and thus would be subject to tax if they were the surviving spouse.
  • Q: What's the best way to disinherit someone?
    • To disinherit someone who would otherwise likely receive a portion of your estate through the Vermont intestacy laws, you need to have a written will or trust. Absent a written document, the intestacy laws will control. With a will or trust, most attorneys suggest naming the person who you wish to disinherit, but stating that although they are a child (or other relationship) of yours, you wish to leave them nothing. Many attorneys advise against providing reasons for your actions, as the disinherited person could contest the will later on the grounds that those reasons no longer applied. Some attorneys recommend leaving the person a nominal amount and including a “no contest” provision. By doing this, the disinherited person has to weigh receiving the nominal amount against contesting the will and potentially receiving nothing if they lose in court.
    • Keep in mind, surviving spouses cannot be disinherited. A surviving spouse may waive the will and exercise their “elective share” to take one-half of their deceased spouse’s estate. Your children and others do not have similar rights.
  • Q: What are some good ways to begin discussing my parent's estate plan?
    • There are three common approaches to raising the issue of estate planning with elderly parents. One method is to discuss what happened to a family friend or neighbor who recently died, particularly if the lack of estate planning caused family problems. You and your parents can learn from their mistakes. Another method is to begin your own estate planning and mention to your parents what you have learned. You can also state that your attorney wants to know how your parents estate planning is set up so that the attorney can plan accordingly. The final method is to suggest your parents get organized, first with getting important paperwork in order, then addressing incapacity issues with an Advance Directive, a power of attorney for finances and a HIPAA release. Once your parents complete those documents, the next natural step is drafting a will or trust. Be aware that patience is important, and recognize that as the elderly get older, one of their biggest fears is losing control, so attempting to micro-manage the process could very well backfire. It’s never an easy conversation, but it will undoubtedly benefit everyone.
  • Q: What is gift splitting?
    • When a married person makes a gift to a person other than his or her spouse, both spouses may elect to treat the gift as though it had been made one-half by each of them. This allows a donor to make a gift of double the annual exclusion amount ($15,000 in 2018), if their spouse consents.
    • There are some rules. First, both spouses must be a citizen or resident of the United States. Second, the couple must be married at the time of the gift and the consenting spouse may not remarry during the remainder of the calendar year. Third, an election to split a gift applies to all gifts during the calendar year when the gift was made. In other words, spouses may not pick and choose which gifts made during the year will be treated as split gifts and which will not. The spouse’s consent to splitting gifts is made on a gift tax return that is due by April 15 of the year following the year in which the gift was made.
  • Q: What are Crummey Powers?
    • Crummey powers are often used in conjunction with Irrevocable Life Insurance Trusts (ILIT) to make a gift to a trust qualify for the gift tax annual exclusion. In order for a gift to qualify for the gift tax annual exclusion, it must be a gift of a present interest. In the context of ILITs, the Grantor makes a gift to the trust, which the trust beneficiary has the power to withdraw. If the beneficiary does not exercise the power to remove the contribution within a stated time period, often 30 days, the power lapses and the contribution can be used to pay a life insurance premium or for other purposes. It’s important that there not be a written understanding or other agreement between the Grantor and the beneficiary that the beneficiary will not remove the Grantor’s gift to the trust, because then the IRS will find that the Grantor’s contribution was not a present interest gift.
  • Q: What powers does a guardian have?
    • The answer depends on the Probate Judge who appointed the guardianship. The Probate Judge usually designates specific powers to the guardian in regard to the ward. Aside from the specific powers, guardians must promote and protect the best interests of the ward, and ensure that the ward receives the benefits and services that the ward is entitled to. Common benefits and services include education for wards of school age, residential services for wards who lack adequate housing, nutritional services, medical and dental services, and therapeutic and habilitative services, such as adult education and vocational rehabilitation.
  • Q: What should be on the agenda for an estate planning family meeting?
    • The circumstances surrounding the family meeting often drive the agenda. Most family meetings include having the attorney provide the children a general overview of their parent’s estate plan, including how the plan is designed to work, and how the children will inherit, e.g. either in trust or outright. If the children are inheriting in trust, which is increasingly common, the children need to be advised of the benefits of this approach, and the importance of leaving assets in trust for as long as reasonably possible. A similar discussion is usually held regarding IRA assets and how they will pass. Successor trustees and other fiduciaries should also be informed of their future role, what will be expected of them, and how they can access help when they have questions. One of the primary purposes of a family meeting is to avoid surprises later, so that children can understand what their parents did in their estate plan, and why they did it that way. Family meetings are not appropriate for all families, but when possible, they can head off disputes later that invariably become costly and cause needless divisions among siblings.
  • Q: Do payments for education avoid generation skipping transfer taxes?
    • Yes, provided the payment for tuition is a qualified transfer falling under Internal Revenue Code Section 2503(e). Qualifying tuition payments are not treated as a transfer of property by gift, nor are they subject to the generation skipping transfer tax (GST).
    • GST exemptions apply to the annual gift tax exclusion ($15,000 per year in 2018) and direct payments for qualifying tuition or medical expenses under IRC 2503(e) because the GST rate of tax depends on the definition of the exclusion ratio. The exclusion ratio for direct skips that are nontaxable gifts is set equal to zero, therefore there is no tax on these transfers.
  • Q: What are some last minute estate planning options?
    • Provided the person is still competent, traditional estate planning can be done on an expedited basis. Some attorneys are willing to turn around an estate plan, including funding of trusts, within a few days, although usually at a premium to the attorney’s standard rates. Other options include using the annual gift exclusion to make cash gifts to any number of people, and if the person is married, gift splitting should be under consideration. Also in the gifting area, payments for a family member or friend’s medical expenses or tuition payments would also be tax free, provided the payments are qualified and made directly to the institution. Gifts to charitable organizations should also be considered.
    • If the person is not competent, these options are probably not be available unless the person has completed a durable power of attorney for finances that specifically authorizes an agent to make gifts on behalf of the principal. In Vermont, an agent may not make a will on behalf of the principal, but there is no similar prohibition on making a trust, provided the power of attorney specifically authorizes it.
    • Other options may exist, but would require speaking to an estate planning attorney regarding the specifics of the situation.
Incapacity Planning
  • Q: What does "power of attorney" mean?
    • Power of attorney is a phrase deriving from agency law, which is concerned with a person (the principal) granting another person (the agent) the authority to act on the principal’s behalf. The concept is important particularly in contract law, where the question is often posed: did an agent who signed a contract on behalf of a principal have the authority to bind the principal to the agreement. In estate planning, the term most often arises in two documents: the power of attorney for finances, and the power of attorney for health care, also known in Vermont as an Advance Directive.
    • In a power of attorney for finances, the principal names an agent to make financial decisions and take related actions on the principal’s behalf. Powers of attorney can be limited to specific actions such as signing closing documents for purchasing a house, or very broad in anticipation that the principal may become incapacitated due to old age or illness.
    • A power of attorney for health care allows the agent to make medical decisions on behalf of the principal, for instance if the principal is in an accident and can not express their health care wishes.
    • Both of these documents are important, and should be included in your overall estate plan.

 

  • Q: What is HIPAA and why should I have a HIPAA Release?
    • The Health Insurance Portability and Accountability Act restricts release of your medical information to protect your privacy.  Although well intentioned, the law sometimes prevents family members and others from being able to access your medical information.  If you are unconscious and unable to express your desires on who should have access to your medical information, most hospitals and other institutions will err on the side of caution and not release your medical information, such as your medical condition, prognosis, even which hospital you are in. 
    • If you want certain people to have access to your medical information, such as family members or friends, you can complete a HIPAA Release, whereby you authorize medical institutions to release information to the people you have listed in the HIPAA Release. 
    • HIPAA releases are particularly important for college aged children, because when a child turns 18, in most cases a parent no longer has a right to the child's medical information. Yet, both the child and the parent would want to parent to know what's going on if the child has been injured or become ill while away at school. Similarly, elderly parents may wish to list their children on a HIPAA Release so that their children can be aware of their condition if they are admitted to a hospital.

 

  • Q: What is a Living Will?
    • Living wills allow you to provide guidance on the types of health care you want or don’t want, and to name an agent to make health care decisions on behalf. In Vermont, living wills are known as advance directives.
    • You may wish to provide health care guidance in the event you are in a critical accident and thus unable to express your health care wishes to your doctors. In this section you can agree or disagree with statements where a general condition is contemplated, such as if death is imminent, would you nonetheless want extraordinary measures used to keep you alive, or if you are in a coma and the likelihood of recovering consciousness is small, do you want to be kept alive on artificial respiration and other measures. The guidance would be used by your doctors and your health care agent, if one is named, to decide on a course of medical treatment.
    • The Vermont advance directive also allows you to name someone to make health care decisions for you. On this form, the “principal” is the person who fills out the advance directive document, and the person who they name to make health care decisions for them is known as the “agent.” The agent is someone you designate to make health care decisions on your behalf if you are unable to do so.  This could occur if you are unconscious or are unable to understand the nature and consequences of your health care decisions.  The agent’s authority to make decisions on your behalf applies only when you lack the capacity to make your own decisions. If you subsequently regain the capacity to make your own decisions, the agent’s authority ceases.

 

  • Q: Where can I get a Living Will or an Advance Directive?
    • If you live in Vermont, the Vermont Ethics Network has a website from which you can download the most popular Advance Directive forms in the state. If you live in a different state, you can visit the S. Living Will Registry to see if your state has a form available.

 

Wills
  • Q: Do wills and living trusts have to be registered with the Probate Courts?
    • Prior to the death of the creator of the will or trust, no.  Wills are often kept for safekeeping in the Probate Court located in the Vermont County where the creator is living, but that is not mandatory.  After a person dies, their will must be submitted to the relevant Vermont Probate Court within 30 days of their death, at which time the probate process commences. 
    • If a person dies without a will or trust, known as dying intestate, the probate process usually begins in the relevant Vermont Probate Court following submission by a survivor of the decedent of a petition to open a probate estate.
    • Many trusts, including most revocable living trusts, need not ever be provided to the Probate Court.  In most instances, a revocable living trust is a will substitute.  In practice, this means that administering the trust settlor’s estate is done outside of probate, which is one of the primary reasons people choose a trust over a will when first engaging in estate planning.

 

  • Q: What are the duties of an executor?
    • Executors are tasked primarily with gathering together the decedent’s estate, determining the extent of the decedent’s debts, filing the estate’s final tax forms, managing the estate assets prudently during the probate process, filing accountings with the probate court and distributing estate assets according to the court’s final distribution order. During this process there are numerous tasks that must be completed, often on a schedule set by the probate court. The executor’s responsibilities will vary depending on the types of assets in the estate, whether certain items should be sold during probate, and whether there are any challenges to the will.

 

  • Q: Do the provisions of a will override a beneficiary designation?
    • No, rather a beneficiary designation overrides the provisions in your will. The reason is that your beneficiary designations form part of a contract that you have with the financial institution managing the account, and contractual provisions overrule language included in a will. For this reason, it is advisable to check every couple years to ensure all of the beneficiary designations on your financial accounts, including retirement accounts and life insurance policies, are up to date and reflect your current wishes. Also, if you are recently divorced or widowed, update your beneficiary designations immediately. It frequently happens that former spouses receive life insurance proceeds, to the dismay of current spouses.

 

  • Q: Can beneficiary designations be overruled by a new will?
    • No, properly completed beneficiary designations always override a previous or subsequently written will because beneficiary designations are part of a contract between the financial institution and the account owner. A will, on the other hand, is not a contract and may not override beneficiary designations. This was recently reaffirmed in a Supreme Court case, Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. In this case, the Supreme Court unanimously ruled that the failure of an account owner to update a beneficiary designation meant that his pension plan passed to his ex-wife, not his daughter, even though the ex-wife had agreed in a divorce decree to forfeit all right, title, interest and claim to the husband’s pension plan. Because the pension plan named the wife as primary beneficiary at the time of the husband’s death, the wife received the pension sum.

 

  • Q: What is "undue influence," and what factors determine if undue influence was exerted?
    • Undue influence occurs when a donor no longer exercises free will, and the resulting transactions are thus considered tainted, according to Vermont case law. In essence, when undue influence is being exerted, the donor is being coerced, and the donor’s judgment and desires are not being reflected in the resulting transaction.
    • Charges of undue influence may arise in probate or related court proceedings, particularly when there are suspicious circumstances surrounding the execution of the relevant documents. Suspicious circumstances include relations of trust and confidence whereby the opportunity for one party to abuse the other exists, such as between a person writing a will and their beneficiaries, guardian and ward, and spiritual advisor and persons turning to them for advice.
    • In determining if undue influence was present, the courts look to see if the transaction was made at arms length, i.e. the donor and the donee are not related or on close terms, and are presumed to have equal bargaining powers. Additionally, the courts will want to know if the donee profits financially from the transaction, whether the donee was acting in a fiduciary capacity to the donor, and if the transaction is consistent with the donor’s wishes expressed prior to the time when undue influence became a concern. Courts may also consider other factors as determined relevant to the specific circumstances of the case.

 

  • Q: How do you file a will for safekeeping in Probate Court in Vermont?
    • To file a will for safekeeping, you should have the will placed in a sealed envelope with the following information on the envelope: (1) Testator’s full name; (2) Testator’s address; and (3) Testator’s executor(s). Many attorneys will also put their name and contact information on the envelope. The envelope should be presented to the clerk of the Probate Court with a check for $21. Remember that if you amend your will, you should be sure the Probate Court receives a copy of the updated will, in an envelope just as above.

 

Living Trusts
  • Q: What is the Vermont Trust Code?
    • The Vermont Trust Code is a new set of laws governing trusts and trust administration in Vermont that went into effect on July 1, 2009. The Vermont Trust Code is based on the Uniform Trust Code, which has been adopted in approximately half the states in the country. Like most states that adopted the Uniform Trust Code, Vermont made some changes to the language to tailor the Vermont Trust Code to legal practices and conventions in Vermont.
    • Most of the Vermont Trust Code’s provisions are default rules, meaning that they can be overridden by language in a trust drafted by your attorney. However, certain rules are mandatory and will apply even if your trust states otherwise. For example, the Vermont Trust Code’s provisions impacting how and when beneficiaries of an irrevocable trust must be notified of the trust can be changed according to the wishes of the person making the trust. However, provisions stating that a trust can be created only to the extent that its purposes are lawful cannot be changed, i.e. a trust created for unlawful purposes is not a valid trust.
    • The Vermont Trust Code updates Vermont estate planning laws in many significant areas, and provides far more flexibility for testamentary trusts and out-of-court trust amendments than was previously allowed. Thus, it’s a welcome addition to the practice of estate planning in Vermont.

 

  • Q: Does a living trust need to be filed with the Probate Court?
    • The only time this might be necessary is if there is a dispute involving a trust document and resolving that dispute requires court intervention. Generally, living trusts remain out of reach of the courts during the grantor’s lifetime, during administration when subtrusts are created or assets are being distributed to beneficiaries, and during any subsequent periods when subtrusts, such as beneficiary controlled trusts, remain in existence. A well drafted trust makes provision for all contingencies that are likely to arise, thus the likelihood of needing to take the trust to court is very small.
    • One of the primary purposes of creating a revocable living trust is the fact that your family can avoid the expenses, delays and inconveniences of the probate process. If you have a will, or no estate plan at all, your survivors will have to pass through probate every asset that does not automatically pass to someone else through joint tenancy, beneficiary designation or similar operation of law.

 

  • Q: Why do my parents have two trusts instead of one?
    • In most common law states, including Vermont, estate planning attorneys have historically drafted an individual revocable living trust for each spouse. There was uncertainty about tax implications of a single joint trust, and it was thought that administration of a single trust upon the death of the first spouse would be easier.
    • Following widespread use of single joint trusts for couples in California, a community property state, joint trusts have become more popular in separate property states too. Through careful drafting, joint trusts can accomplish the same objectives as individual trusts, and are as easy to manage during the administration period following the death of the first spouse. Today, many estate planning attorneys prefer joint trusts because most couples are more comfortable with a single trust that holds their property together, rather than single trusts that require splitting joint assets between the two trusts.

 

  • Q: What is a Credit Shelter Trust?
    • A credit shelter trust, also known as a bypass trust, is designed to shelter up to one full federal estate tax exemption amount.  All citizens are allowed an exemption from federal estate taxes, which represents the amount that can pass tax free to beneficiaries.  In 2013, the federal exemption amount allows up to $5.25 million in assets to pass to beneficiaries before federal estate taxes kick in.  However, too often people lose their exemption because they do not plan ahead.
    • For instance, suppose you and your spouse are together worth $7 million, which includes real estate, financial accounts, life insurance proceeds, recent inheritance from parents and various other assets.  If you and your spouse each have a simple will that passes the assets of the first to die to the survivor, the survivor could end up with a $7 million estate, but only one exemption. If the exemption amount hasn’t changed at the time when the survivor dies, the estate may have a federal estate tax liability on the amount over $5.25 million.
    • One of the principal aims of trusts is to ensure that the first decedent’s exemption is not lost.  By creating a trust to preserve the first decedent’s exemption, money can later be placed in the decedent’s credit shelter trust such that it is not later included in the surviving spouses taxable federal estate. For example, with the couple owning $7 million, half of that might be placed in the decedent’s credit shelter trust, and the surviving spouse’s trust would own the other half. When the second spouse died, their taxable federal estate would amount to only $3.5 million, and thus even if the estate grew in the intervening years, it would be unlikely to exceed the exemption amount of $5.25 million.

 

  • Q: Can you protect your children's inheritance if you die first and your spouse remarries?
    • Yes, but you have to avoid simplistic estate planning that leaves everything to your spouse if you die first. Most basic wills leave everything to one’s surviving spouse, who may decide how all the family assets are distributed upon their death, because they own everything. Instead of leaving everything to your spouse, you can leave your share of the family assets to your children in trust, but give your spouse limited access to the assets in trust for the remainder of his or her life. That way your spouse has access to the assets so that their standard of living can be maintained, but upon your spouse’s death, the assets pass to your children. This is a common planning scenario where blended families are involved. Blended families exist where one or both spouses has children from a prior marriage.

 

  • Q: How can I ensure my children receive an inheritance if I die and my spouse remarries?
    • You can accomplish this through a will or a trust. If through a will, you simply name your children as beneficiaries. Keep in mind that your spouse has a right to what’s known as an “elective share” whereby they can inherit a portion of your estate regardless of what the will states. One problem with the will approach is that if you leave a sizable portion of your estate to your children, your spouse might need to scale back their standard of living. For this reason, many people opt for a trust that is structured so that the surviving spouse has limited access to the deceased spouse’s assets for the remainder of the surviving spouse’s life, but upon the death of the surviving spouse, the assets pass to the first decedent’s children. By creating the trust structure, you are allowing your spouse to maintain their standard of living, while ensuring that the remaining funds eventually pass to your children.

 

  • Q: Can a beneficiary also be a trustee of a trust?
    • A beneficiary may also be a trustee of a trust, but depending on what the trust is intended to accomplish, you need to be very careful in deciding who the trustee should be.
    • Beneficiaries also fulfill the role of trustee in two common situations.  First, where the creator of a revocable living trust, also known as the settlor or grantor, is a beneficiary and also trustee of their revocable living trust until they die.  Second, if the deceased settlor drafted the trust to create beneficiary controlled subtrusts upon the settlor’s death, the subtrusts will likely name the beneficiary as trustee for many purposes, but not others, such as distributing funds from the subtrust.
    • Naming a beneficiary as trustee has many implications that will impact federal and Vermont estate taxes, the degree of asset protection available, and, depending on the potential trustee’s abilities, whether the purposes of the trust are carried out.  Also, be aware that a person cannot be the sole trustee and sole beneficiary, but may be the only current trustee and beneficiary provided successor trustees and beneficiaries are named.
    • Who is named as trustee of the trust is a central question the trust settlor should not take lightly.  

 

  • Q: What is a Trust Protector?
    • A trust protector, also known as a trust advisor, is a person serving in a fiduciary capacity that may amend a trust to bring it up to date with changing federal or state tax laws, change the governing law or principal place of administration of the trust, and perform other specific duties or functions normally completed by a trustee, among other powers. Trust protectors are frequently included in trust documents to add flexibility, particularly where beneficiaries receive their inheritance in trust. Because these beneficiaries’ trusts could be in existence for several decades, it is important to ensure that the trusts can be updated so that they remain current with changing tax and trust laws. Absent the ability to update a trust, the trust may become obsolete and of little practical use. The beneficiary would then lose the benefits of retaining their inheritance in a trust.
    • Trust protectors are usually given specific powers spelled out in the trust document, although pursuant to the Vermont Trust Code, 14A V.S.A. § 1101, a court or beneficiaries acting in agreement pursuant to provisions in the trust, may empower a trust protector to have specific powers or duties.
    • Determining who should be the trust protector requires balancing several factors, which is a discussion to have with an experienced estate planning attorney.

 

  • Q: What are the different types of Trust Protectors?
    • Because trust protectors, also known as trust advisors, have become widely used in domestic revocable living trusts only during the past decade, there is some confusion about what they are, what they do, and why they are needed. In regard to the question above, what are the different types of trust protectors, the differences among trust protectors are really more a question of which powers a trust protector has, rather than what “type” of trust protector they are.
    • In Vermont, the Vermont Trust Code specifies thirteen powers for trust protectors, including the power to modify or amend the trust instrument to achieve favorable tax status, to take advantage of changes in the rule against perpetuities, to review and approve a trustee’s reports and accountings, to remove a trustee or co-trustee, and to increase or decrease any interest of a beneficiary of a trust, among other powers.
    • Trust protectors are often a good idea to prevent a trust from quickly becoming inflexible after the trust becomes irrevocable, for example when a client’s living trust is split into beneficiary trusts after the death of the client. If a trust protector is not named, and the tax laws change, which they frequently do, a trust can quickly become out of date and unworkable unless the beneficiary goes to court to have the trust reformed. The problem with going to court is that it is unnecessarily costly and it’s impossible to know if the judge will grant the requested trust changes. Trust protectors all these changes to be made outside of court, which is less costly, more timely, and more predictable.

 

  • Q: Can a Trust Protector also be a Trustee?
    • Yes, but it would be a bad idea. One role that some Trust Protectors, also known as a Trust Advisors, have is to remove and replace a Trustee under various circumstances. If the Trustee and Trust Protector are the same person, that oversight role would be lost. Additionally, Grantors often try to prevent trust assets from being included in the Trustee’s or Trust Protector’s taxable estate, which would be far more difficult if standard Trust Protector powers were added to standard Trustee powers. In short, these are distinct roles that should be kept separate. Merging them in the same person would likely cause ramifications in many other areas of the trust agreement that would be undesirable to the Grantor, the Trustee and the Trust Protector.

 

  • Q: What is the role of the Trust Protector when the first spouse dies?
    • The Trust Protector, also known as a Trust Advisor, can have several roles regarding a trust. Principal roles typically include naming a successor trustee where a vacancy exists and the trust document does not specify who should fill that role, and amending an irrevocable trust (or portion of a joint trust) to bring it up to date with new tax laws, fix scriveners errors, or resolve ambiguities in the trust language, among other powers.
    • Upon the death of the first spouse, presuming a living trust is involved, then either the deceased spouse’s standalone trust has become irrevocable, or the deceased spouse’s portion of a joint trust has become irrevocable. In both instances, the trust document likely names who the successor trustee should be, and the trust document must be followed. So there is probably little or nothing that needs to be done by the Trust Protector immediately. You need to review the trust document to first ensure that provisions were made for naming a Trust Protector, to spell out what powers the trust protector has, and then determine what issues, if any, have arisen with the irrevocable trust that require the Trust Protector’s involvement.
    • In Vermont, Trust Protectors have fiduciary obligations, so the Trust Protector is advised to consult an estate planning attorney before taking any action, particularly where the action might benefit some beneficiaries over others.

 

  • Q: Does a trust have to be set up in advance to be the beneficiary of another trust?
    • While it might be possible for a standalone recipient trust to be set up to accommodate a pending distribution from a pre-existing trust, in practical terms the recipient trust must be properly named in the distribution trust in order for the distribution to proceed. If the recipient trust is not properly named, and trust names should include the date of creation, then there is likely to be ambiguity as to what the grantor intended.
    • Most often, subtrusts spring from a pre-existing trust, for example a married individual’s revocable living trust converts into an irrevocable credit shelter trust, and possibly an irrevocable marital trust. Or, an unmarried individual’s trust converts into irrevocable beneficiary controlled trusts for their children. In these situations, the subtrusts are not set up at the time of the original trust’s execution, but rather come into being upon the death of the grantor.

 

  • Q: Does a revocable living trust ever become irrevocable?
    • Yes, upon the death of the settlor. But first, a review of terminology. Revocable means that the trust can be amended, restated or terminated by the settlor. The settlor is the person who creates the trust and funds it. Irrevocable means that once the trust is created, may not be amended or restated, but may terminate once there are no longer any assets in the trust.
    • Most trusts today are known as revocable living trusts, or inter vivos These trusts are the principal document in most estate plans, and serve as a will substitute. Because they are revocable, they can be amended for specific purposes such as changing beneficiaries or trustees, or restated when the entire document is brought up to date.
    • Revocable living trusts, however, become irrevocable upon the death of the settlor. When the settlor dies, the terms of the trust cannot be amended. This protects the settlor’s intent and instructions as to who the beneficiaries should be, and when they should receive the trust assets, among other things.
    • If you have a joint trust with a spouse, then the decedent’s portion of the joint trust becomes irrevocable while the surviving spouse’s portion of the trust remains revocable. This is accomplished by separating the joint trust into separate subtrusts per the instructions in the joint trust. The decedent’s subtrust(s) are irrevocable, while survivor’s subtrust(s) remain revocable.
    • Some advanced trusts are irrevocable from the outset, such as Irrevocable Life Insurance Trusts (ILIT) principally for tax reasons. Whether a trust is revocable or irrevocable is a key distinguishing feature of trusts, and has many implications you need to be aware of before signing.

 

  • Q: What is an unfunded living trust?
    • An unfunded living trust is a trust that has been created during one’s lifetime, but funded with only a nominal amount. The rationale behind an unfunded living trust is to have the trust ready to receive assets after the death of the settlor (i.e. the person who created the living trust), but not cause unnecessary inconvenience to the settlor while they are still alive.
    • In the case of an unfunded living trust, the settlor’s assets would pass through probate then, via a pour-over will, be placed in the living trust, which became irrevocable upon the settlor’s death. The trust assets would then be held for or pass to the beneficiaries as determined by the terms of the trust.
    • For most people, the better path is a funded living trust, in other words, a living trust set up during the settlor’s lifetime that holds nearly all of the settlor’s assets from the time the trust is created. A fully funded living trust avoids having to go through probate later. Additionally, one of the big advantages of funded living trusts is that a successor trustee can manage the settlor’s assets if the settlor becomes incapacitated. This avoids having to petition the probate court to be named conservator for the settlor in order to receive the court’s approval to act on behalf of the settlor.
    • While some would have you believe that funding a living trust and managing the funded living trust is an inconvenience, or worse, the truth is otherwise. Initial funding is usually handled by the estate planning attorney, and managing trust assets in a trust is little different than managing assets outside of a trust. Thus, the benefits of a funded living trust far outweigh the alleged inconvenience. It’s best to avoid probate and cover yourself during incapacity by having your assets in the living trust from the very beginning. If your attorney suggests otherwise, seek a second opinion from an attorney that focuses solely on estate planning.

 

Probate in Vermont
  • Q: Is it necessary to have the Probate Court appoint an executor if the executor has already been named in the deceased person's will?
    • Yes, because an executor is not authorized to act in the capacity of executor until being officially named as the executor by the Probate Court. The will states the decedent’s preference that the named person serve as executor, but it will be the Probate Court that makes the final decision. If the person named to fulfill the role of executor files the will with the Probate Court and no interested persons object to that person being executor, the Probate Court usually acts very quickly to issue Letters Testamentary appointing the person as executor of the estate. If any of the interested persons object, then the Probate Court usually holds a hearing to discuss the objections and whether the named person should be appointed executor.

 

  • Q: In Vermont, how long does it take to be appointed executor of an estate?
    • If the person seeking to be named executor was named in the will as the decedent’s choice to be executor, and none of the interested persons or others protest the choice of the executor, the probate court often acts within a matter of days or weeks in formally appointing the executor. Where there is no will, or where there might be concerns about the proposed executor named in the will, or where more than one person seeks to be the executor, the probate court may seek to hold a hearing or receive written comments on the matter, and subsequently make a ruling. The latter process might take a month or more, although the probate court usually seeks to resolve the issue of appointing an executor fairly quickly so that someone can manage the deceased person’s estate during the probate process.

 

  • Q: What are the duties of an executor?
    • Executors are tasked primarily with gathering together the decedent’s estate, determining the extent of the decedent’s debts, filing the estate’s final tax forms, managing the estate assets prudently during the probate process, filing accountings with the probate court and distributing estate assets according to the court’s final distribution order. During this process there are numerous tasks that must be completed, often on a schedule set by the probate court. The executor’s responsibilities will vary depending on the types of assets in the estate, whether certain items should be sold during probate, and whether there are any challenges to the will.

 

  • Q: Is the guardian of a ward the ward's executor after the ward dies?
    • Guardians and executors are two distinct roles, and while the guardian may become the executor, the Probate Court will address the issue of who should be the ward’s executor independently of who was previously named as guardian.

 

  • Q: Does real estate that is devised or bequeathed go through probate in Vermont?
    • Yes, in fact devise and bequest (or bequeath) are terms of art that specifically related to probate assets. Devise means the act of giving property, usually real property (land), by will. Bequest means the act of giving property, usually personal property, by will.
    • If an asset was transferred to an heir outside of probate, for example a financial account that passed via beneficiary designation, it would not be a bequest in the traditional sense of the word because it is not passing by one’s will. So, all devises and bequests, by definition probate assets, would have to pass through probate in Vermont.

 

  • Q: Does a vehicle have to go through probate in Vermont?
    • There are several ways for vehicles to avoid the probate process in Vermont. One of the more common methods is to ensure a vehicle is jointly owned, so that upon the death of one owner, title to the vehicle automatically passes to the surviving owner(s). If a vehicle is owned by an individual, a recent law change allows a Transfer on Death (TOD) designation to be added to the vehicle’s title. Under this arrangement, upon the vehicle owner’s death, the vehicle can be re-registered in the name of the TOD beneficiary without having to pass through probate first. Finally, a vehicle can be placed in a trust, although this approach is generally not advised given the simpler approaches above.

 

  • Q: Is a life insurance policy that has a beneficiary designation part of one's probate estate?
    • If a life insurance policy has a proper beneficiary designation, and the beneficiary is alive to receive the proceeds, then the life insurance proceeds should not be part of the Vermont probate estate. Proceeds from life insurance policies pass via contract, which supersedes the provisions of a will.
    • Keep in mind that one’s probate estate is different from one’s taxable estate. Proceeds from life insurance policies are usually included in the decedent’s taxable estate, unless the policy is owned by an irrevocable life insurance trust (ILIT).

 

  • Q: What is an estate inventory?
    • An estate inventory is most often used in the context of probate proceedings. It is the list of assets owned by the decedent before death, which will be subject to the probate court proceedings, as compiled by the executor. This might include bank accounts, vehicles, real estate and miscellaneous property. Some assets avoid probate, such as real estate that passes to a joint owner by operation of law or financial accounts that have a valid beneficiary designation. Non-probate assets would not appear on the estate inventory.
    • Typically, the probate court requests an estate inventory shortly after the executor is named, and then requires regular accountings of what changes, if any, affect the estate inventory. At the end of the probate process, the executor must account for all probate assets listed on the original estate inventory, and any added since then, as well as indicate the proposed distribution plan. Following the probate court’s approval of the final estate accounting, the executor distributes the estate assets pursuant to the distribution plan.

 

  • Q: How long does probate court take in Vermont?
    • The probate process can be straightforward or contentious and complicated, depending principally on three factors: how large the estate is, the types of assets included, and whether anyone contests the will.  Small and uncomplicated estates usually take 3 – 12 months in Vermont, while complicated estates can take years. The Vermont Probate Courts have said the average probate takes one year.

 

  • Q: What happens if the executor dies after the will maker?
    • The executor is named by the probate court to manage the probate process. If an executor dies in the midst of carrying out their responsibilities, the probate court will name a new executor to take over. The probate court would likely review the will to see if a backup executor had been named by the decedent. If so, the probate court would likely name that person absent a compelling reason not to. If no backup was named, the probate court would seek to name a willing survivor of the decedent who was in the best position to take over the responsibility.

 

  • Q: What does a "Transfer on Death" designation mean?
  • A Transfer on Death designation allows the principal owner of an asset, such as a vehicle, to maintain absolute control over the asset until their death. Upon their death, the asset passes to the Transfer of Death beneficiary automatically, without having to go through probate.
  • The Transfer on Death designation is preferable to adding another person as a joint tenant to the title of an account or a vehicle because joint tenancy ownership has some disadvantages. These include the fact that the joint tenant may wish to sell the asset later when the principal owner wants to hold on to it, or that the joint tenant refuses to sell an asset even though the principal desires to. Resolving these issues can be difficult.
  • Another benefit Transfer on Death has over joint tenancy is that you can add a Transfer on Death beneficiary and later change your mind and remove them. If you add a joint tenant, you need their agreement later to get them off the title to the asset.
  • Different states allow Transfer on Death beneficiaries for various assets. In Vermont, they have recently been allowed for vehicles. Similar options, such as a Pay on Death designation, are available for some financial accounts. For deeds to real property, it’s more complicated, and an estate planning attorney should be consulted.

 

 

  • Q: In Vermont, do vehicles have to pass through probate?
  • Generally yes, because title to the vehicle must be transferred to the new owner before the new owner can register the vehicle in his or her name. This would normally happen if the vehicle is owned by an individual. If the vehicle is jointly owned, for example with a spouse, the vehicle would pass to the surviving joint owner by operation of law, without having to pass through probate.
  • When a vehicle is owned by an individual, there are still two ways to avoid having a vehicle pass through probate. The first is to place the vehicle in a trust, such as a revocable living trust. However, this is discouraged by most estate planning attorneys because if you end up in a car accident and the other driver sees that your vehicle is in a trust, often they assume you must be rich, and therefore they hire the best attorney they can to win a big judgment against the “deep pockets.”
  • The better approach is to leave vehicles outside of your trust even if you have a trust, and instead take advantage of a recent Vermont law that allows a transfer-on-death beneficiary designation to be added to the vehicle title. Upon the vehicle owner’s death, the designated beneficiary may re-register the vehicle in their own name, but because of the addition of the transfer-on-death beneficiary designation, there is no need to transfer title of the vehicle through the probate process.

 

 

  • Q: What is abatement?
  • Abatement is a term used in wills and the probate process for a situation where there are insufficient assets in the probate estate to pay all of a decedent’s debts and legacies. The concept is similar to the priority of creditors claims, where certain creditors are paid before others.
  • When insufficient assets exist, the Vermont probate statutes require that gifts be “abated”, i.e. not paid, in the following order: first, property not mentioned in the will goes unpaid; second, property making up the residuary estate is not paid, even if someone is named to receive the residuary estate; third, general devises and bequests, which are gifts that don’t specify or describe the gift, e.g. “my real estate,” are not paid; and fourth, specific devises and bequests, or gifts of specific real property or personal property. When abatement ends at a certain level, gifts within that level are pro-rated.
  • Q: What does "Right of Representation" in a will or trust mean?
  • Right of Representation is one of three common law survivorship options for passing assets to the descendants of your children that comes into play if a child predeceases you. For example, if you leave assets to three children, but one of your children dies before inheriting, your will or trust should have some default language detailing what percentage of the assets the deceased child’s children will receive.
  • For each of the following situations, assume there are three children, Peter, Paul and Mary who each inherit one-third of your assets. Peter has one child (Andrew), Paul has two children (Bob and Chris), and Mary has three children (Denise, Eunice and Francine).
  • Per Stirpes. The most common survivorship method is known as “per stirpes,” which means shares are determined by the number of children at the first level. Under this approach, if Peter and Paul predeceased, but Mary was still living, allocation among children and grandchildren would be as follows: Mary receives her one-third; Andrew receives one-third; and Bob and Chris each receive one-sixth. If all three children had predeceased, Mary’s one-third would be evenly split among her three children, so that each received one-ninth. In short, this approach means that each child receives their one-third share, and if the child predeceases, their share is evenly divided among their children.
  • By Representation. An alternative approach is known as “by representation,” which means shares are determined by the number of descendants at the first level that has living descendents. This is the same as per stirpes if one or more children are alive, but different if only grandchildren survive. If no children survive, the estate is divided equally among living grandchildren. Thus, Mary’s children do not receive a lesser amount because Mary had more children than Peter or Paul; instead Mary’s children, as well as Peter and Paul’s, each receive an equal one-sixth of the total estate.
  • Per Capital at Each Generation. An infrequently used alternative is known as “per capita at each generation,” which means shares are determined by the number of descendents at each level. Under this approach, each living child receives their one-third, and at the next generation, all grandchildren inherit equal shares, regardless of whether they have several sibling or no siblings. For example, suppose Peter and Mary predecease. Paul receives his one-third, and the children of Peter and Mary inherit equally, in this case each receives one-quarter of two-thirds, or one-sixth.

 

 

  • Q: What is "undue influence," and what factors determine if undue influence was exerted?
  • Undue influence occurs when a donor no longer exercises free will, and the resulting transactions are thus considered tainted, according to Vermont case law. In essence, when undue influence is being exerted, the donor is being coerced, and the donor’s judgment and desires are not being reflected in the resulting transaction.
  • Charges of undue influence may arise in probate or related court proceedings, particularly when there are suspicious circumstances surrounding the execution of the relevant documents. Suspicious circumstances include relations of trust and confidence whereby the opportunity for one party to abuse the other exists, such as between a person writing a will and their beneficiaries, guardian and ward, and spiritual advisor and persons turning to them for advice.
  • In determining if undue influence was present, the courts look to see if the transaction was made at arms length, i.e. the donor and the donee are not related or on close terms, and are presumed to have equal bargaining powers. Additionally, the courts will want to know if the donee profits financially from the transaction, whether the donee was acting in a fiduciary capacity to the donor, and if the transaction is consistent with the donor’s wishes expressed prior to the time when undue influence became a concern. Courts may also consider other factors as determined relevant to the specific circumstances of the case.

 

 

  • Q: How long does a person have to contest a will in Vermont probate?
  • When an executor or other person submits a will and a petition to commence a probate proceeding to the relevant Probate Court in Vermont, they must also send notice of the proceeding to all interested persons. Often the executor will have obtained all of the interested person’s consents to the validity of the will. Interested persons in Vermont include heirs, devisees, legatees, children, spouses, and such other persons as the Probate Court directs. Notice should also be sent to the trustee of any trusts to which assets of the decedent’s estate may be distributed, as well as other fiduciaries representing interested persons, such as a guardian.
  • If not everyone consented to the validity of the will, the Probate Court will schedule a hearing date no less than 14 days after all interested persons were served proper notice. Anyone contesting the will should file a written answer to the petition prior to the hearing, and may provide an oral answer at the hearing, unless the court directs otherwise. Thus, there is no set number of days allowed to contest a will in Vermont, instead a written answer should be filed with the Probate Court before the first hearing is scheduled.

 

 

  • Q: How is an attorney paid for probating an estate in Vermont?
  • Attorneys who engage in probate work in Vermont typically charge by the hour. How much an attorney charges is up to the attorney, but limited by what’s considered reasonable for the work performed. The Vermont Rules of Professional Conduct provide some guidelines for what is “reasonable,” including: (1) the time and labor required, (2) whether taking on the case will preclude taking on other work, (3) fees customarily charged for similar legal services in the area, (4) the amount of money involved and the results obtained, (5) time limitations imposed by the client, (6) the nature and length of the attorney/client relationship, (7) the attorney’s experience and reputation, and (8) whether the fee is fixed or contingent.

 

 

  • Q: In Vermont probate, what is the priority of creditors' claims?
    • When the assets in a probate estate are insufficient to pay all creditors claims in full, Vermont probate law states that the executor must make payment in the following order:
    • Costs and expenses of administration of the estate; then
    • Reasonable funeral, burial, and headstone expenses, and perpetual care not to exceed $3,800 (exclusive of government payments), and reasonable and necessary medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him or her; then
    • Wages due to employees that have been earned within three months prior to the decedent’s death, not to exceed $300 to each claimant; and then,
    • All other claims, including the balance of wages due but unpaid to employees under #3.
    • When there is more than one claim in the same class, and insufficient funds exist to pay all claims in the class, no preference may be given to one claimant over another, rather a prorated amount must be paid to each claimant in the class.

 

  • Q: What is the procedure for ancillary probate administration in Vermont?
    • In Vermont, an interested person begins an ancillary estate proceeding by filing: (1) the ancillary petition signed by the home state fiduciary or other interested person; (2) a list of interested persons; (3) a description of the ancillary property; (4) the filing fee; and (5) an authenticated copy of the will and the probate thereof from the home state court, or other acceptable proof that the will is effective in that jurisdiction. Once the ancillary proceeding has been initiated, the probate process is much the same as a regular probate proceeding.

 

Trust Administration
  • Q: What does a "Transfer on Death" designation mean?
    • A Transfer on Death designation allows the principal owner of an asset, such as a vehicle, to maintain absolute control over the asset until their death. Upon their death, the asset passes to the Transfer of Death beneficiary automatically, without having to go through probate.
    • The Transfer on Death designation is preferable to adding another person as a joint tenant to the title of an account or a vehicle because joint tenancy ownership has some disadvantages. These include the fact that the joint tenant may wish to sell the asset later when the principal owner wants to hold on to it, or that the joint tenant refuses to sell an asset even though the principal desires to. Resolving these issues can be difficult.
    • Another benefit Transfer on Death has over joint tenancy is that you can add a Transfer on Death beneficiary and later change your mind and remove them. If you add a joint tenant, you need their agreement later to get them off the title to the asset.
    • Different states allow Transfer on Death beneficiaries for various assets. In Vermont, they have recently been allowed for vehicles. Similar options, such as a Pay on Death designation, are available for some financial accounts. For deeds to real property, it’s more complicated, and an estate planning attorney should be consulted.

 

Retirement Accounts
  • Q: What is a Plan Administrator or Plan Custodian?
  • A Plan Administrator or Plan Custodian is the financial institution, often a brokerage firm, that administers the retirement plan for the owner.

 

  • Q: What is a Designated Beneficiary?
  • A Designated Beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after the owner dies. Beneficiaries of a Traditional IRA must include in their gross income any taxable distributions they receive. A trust cannot be a designated beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met.
  • Q: What is a Beneficiary Designation form?
  • The Beneficiary Designation Form is used by the plan owner to designate the beneficiary of the plan if the owner dies.
  • Q: What is a Required Minimum Distribution (RMD)?
  • The RMD, also called Minimum Required Distributions (MRD), represents the minimum amount that must be distributed from a retirement plan in certain situations, for instance if a Traditional IRA owner has turned 70 ½ and therefore must begin taking distributions. Failing to take an RMD results in stiff penalties, including the 50 percent excess accumulation penalty.
  • Q: What is the "IRA Account Balance"?
  • The IRA Account Balance is the amount in the IRA at the end of the year preceding the year for which the Required Minimum Distribution is being figured.  For determining the Required Minimum Distribution for a year, you divide the IRA account balance as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy.
  • Q: What is the Required Beginning Date (RBD)?
  • The Required Beginning Date is the date you must start receiving distributions from an IRA.  You must start receiving distributions by April 1 of the year following the year in which you reach age 70 1/2.
  • Q: What is a Stretch IRA?
  • A Stretch IRA refers to a beneficiary’s ability to extend, or stretch out, the timeline for taking Required Minimum Distributions from a retirement plan. This defers taxes and results in greater account growth.
  • Q: What tax penalties can be assessed against retirement plans
  • There are four penalties associated with retirement plans: (1) a 10 percent penalty imposed on distributions taken before the owner turns 59 ½, with certain exceptions; (2) a 50 percent penalty imposed for excess accumulations, where the owner fails to withdraw the Minimum Required Distribution; (3) a 6 percent penalty imposed on excess contributions to an IRA; and (4) a prohibited transaction penalty that disqualifies an IRA and thus makes the account subject to income taxes immediately. Prohibited transactions include borrowing money from the plan, selling property to the plan, receiving unreasonable compensation for managing plan assets, using the plan as security for a loan, and buying property for personal use with plan assets, among others.
  • Q: Can retirement plan assets be moved to another plan administrator?
  • Retirement Plan assets may be transferred, tax free, to a Traditional IRA or a Roth IRA, subject to certain restrictions. Transfers are typically from one Plan Administrator to another Plan Administrator, a rollover of assets from one retirement plan to another, or a transfer incident to a divorce.
  • Q: What is a Traditional IRA?
  • A Traditional IRA is usually a tax-deferred retirement plan, meaning that funds deposited to the plan and account earnings are income-tax deferred (pre-tax funds) until plan funds are distributed. Traditional IRAs are any IRA that is not a Roth IRA or a SIMPLE IRA, and include Simplified Employee Pension (SEP) Plans. Contributions to a Traditional IRA are deductible for income tax purposes, but distributions must begin annually after the owner turns 70 ½ years of age, at which time income taxes are assessed.
  • Q: What happens if a Traditional IRA account does not have a designated beneficiary?
  • When a Traditional IRA does not have a Designated Beneficiary, or the beneficiary fails to qualify as a Designated Beneficiary, the result depends on whether the owner died before the owner’s Required Beginning Date (RBD) or after. If before, the entire plan balance must be distributed not later than December 31st of the calendar year containing the fifth year anniversary of the original owner’s death. If the owner died after their RBD, then the plan must make Required Minimum Distributions (RMD) based on the decedent’s anticipated life expectancy (contained in life expectancy tables developed by the IRS) had the decedent not died.
  • Q: What happens if the spouse is named as beneficiary of an IRA?
  • A surviving spouse may elect to: (1) cash the plan out and pay income taxes now; (2) elect inherited IRA treatment; (3) elect rollover of account treatment and make the IRA their own; or (4) disclaim the IRA and have it pass to the next listed beneficiary. There are important tax and income ramifications to each approach.
  • Q: May a trust be named as a beneficiary of a Traditional IRA?
  • A trust cannot be a Designated Beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met. If the trust is not properly structured and the trust beneficiaries do not qualify as Designated Beneficiaries, the mistake will likely have serious adverse financial impacts on the retirement plan.
  • Q: What is a Roth IRA?
  • A Roth IRA is a type of IRA where contributions are made after income taxes have been deducted. Because income taxes were removed before a Roth IRA deposit was made, distributions from a Roth IRA account are not subject to income taxes. An additional benefit of Roth IRAs is that there are never Required Minimum Distributions during the life of the original plan owner, and thus the plan may grow substantially and become a sizable inheritance for the Designated Beneficiaries.
  • Q: What happens if a Roth IRA account does not have a designated beneficiary?
  • If a Roth IRA plan does not have a beneficiary and therefore ends up in the decedent’s probate estate, or the beneficiary fails to qualify as a Designated Beneficiary, the result is that the account must be paid out by December 31st of the calendar year containing the fifth year anniversary of the plan owner’s death.
  • Q: May a trust be named as beneficiary of a Roth IRA?
  • A trust cannot be a Designated Beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met. If the trust is not properly structured, and the trust beneficiaries do not qualify as Designated Beneficiaries, the mistake will likely have serious adverse financial impacts on the retirement plan.
  • Q: What is a Qualified Plan?
  • A Qualified Plan is an alternative to IRAs, established by employers for their employees. Qualified Plans include Pension Plans, Profit Sharing Plans, 401(k) Plans, and 403(b) Plans. These plans are created under different laws than IRAs, and thus have different regulations governing them, as well as different features and benefits. Qualified Plans are often chosen by employers because employers receive a tax deduction for contributing to the plan, and like Traditional IRAs, employees do not pay income taxes on Qualified Plan contributions or earnings. Rather, Qualified Plans are taxed when distributions are made to the employee.
  • Q: What happens if a Qualified Plan does not have a designated beneficiary?
  • When a Qualified Plan does not have a Designated Beneficiary, or the beneficiary fails to qualify as a Designated Beneficiary, the result is similar to a Traditional IRA. If the plan owner died before the owner’s Required Beginning Date (RBD), the entire plan balance must be distributed not later than December 31st of the calendar year containing the fifth year anniversary of the owner’s death. If the owner died after their RBD, then the plan must make Required Minimum Distributions (RMD) based on the decedent’s anticipated life expectancy (contained in life expectancy tables developed by the IRS) had the decedent not died.
  • Q: May a trust be named as beneficiary of a Qualified Account?
  • A trust cannot be a Designated Beneficiary even if it is a named beneficiary, but the beneficiaries of a trust will be treated as having been designated as beneficiaries if certain trust requirements are met. If the trust is not properly structured, and the trust beneficiaries do not qualify as Designated Beneficiaries, the mistake will likely have serious adverse financial impacts on the retirement account.
  • Q: How do I plan for a large IRA?
  • Options for handling IRAs and other retirement plan assets have expanded in recent years. It is now possible for your spouse and your children to inherit an IRA and use their own life expectancy to establish the required minimum distribution (RMD) schedule. A child’s ability to use their own life expectancy is critically important, because that allows the child to “stretch out” the RMDs as long as possible, while obtaining the favorable tax treatment for the account.
  • Planning for a spouse or child to inherit an IRA is relatively easy. You simply update the beneficiary designations on the account and check them every few years to ensure they remain current with your wishes.
  • There are potential downsides to allowing a young adult to inherit an IRA. Although no hard evidence exist, it is believed that approximately 70 percent of young adults who receive an inherited IRA cash it out within 18 months. What could be a perfect retirement plan for the son or daughter if they removed only the RMDs annually is instead “found money” and wasted, as is the tax-advantaged compounding of plan assets.
  • A better option for many IRA owners, typically those with accounts above $200,000 in value, is to set up a trust that IRA distributions must pass through. By having a Trustee in place, the beneficiary is unable to withdraw more than the RMD unless the Trustee agrees. If the beneficiary is young, the account usually grows faster than the RMDs exhaust it, so your son or daughter could have a sizable account when they retire.
  • Q: Why do retirement plans usually have a standalone trust separate from a revocable living trust?
  • It is not essential, but most estate planners recommend having a separate trust for retirement plan assets. There are several reasons. First, there are strict requirements for a retirement plan trust that are inapplicable to revocable living trusts (RLT), and trying to merge the two makes the RLT much less flexible than it otherwise can be. Second, advanced IRA trusts can function as accumulation trusts, meaning that they receive annual Required Minimum Distributions (RMD) but do not distribute them to the beneficiary. This could become important if the beneficiary is receiving government benefits and the IRA proceeds would offset those benefits. Third, standalone IRA trusts very clearly state that they meet the requirements of being an IRA trust up front, so the IRA custodian, who must receive a copy of the trust, can quickly determine that the trust is a valid IRA trust. This also prevents the IRA custodian from having a copy of your complete RLT. Fourth, a standalone IRA trust alerts beneficiaries to the fact that IRA assets must be handled differently from most other assets, and thus the beneficiary is less likely to withdraw the account assets and waste the tax-advantaged benefits of the keeping the IRA intact as long as possible.
  • Q: Why are IRAs not placed in a revocable living trust?
  • Traditional IRAs and Roth IRAs are not placed in revocable living trusts because if the account owner transferred title of the account to the name of the trust, the IRS would view that as a distribution. In the case of a traditional IRA, the distribution would generate income taxes and possibly penalties for early withdrawals. In the case of a Roth IRA, retitling would likely destroy the tax-advantaged features of the account, and could lead to early withdrawal penalties. IRAs and other tax-advantaged retirement plans generally are never transferred to revocable trusts, although a trust may be named as a contingent beneficiary, typically after one’s spouse and children.