Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

In my experience, one of the most common areas of confusion in wealth and estate planning is beneficiary designations and their importance in many key areas.

Many important assets in an individual’s portfolio often pass at that person’s death by beneficiary designation and not by that person’s will or trust. Common examples of these types of assets include life insurance, retirement plans, individual retirement accounts (IRAs), and annuities. For many, these assets represent a significant portion of their overall assets, yet the beneficiary designations for these assets are sometimes not carefully considered.

Above all, it is very important to recognize that your will or revocable living trust does not control or “override” the beneficiary designations. For example, a parent’s will may direct assets to a trust for minor children if both parents are deceased. If the parent’s life insurance designation names the children directly, then the life insurance proceeds will “miss” the trust entirely, thus potentially requiring a conservatorship for the proceeds until the children reach age 18. While the children may legally be adults at age 18, they may not have sufficient maturity and experience to properly manage large sums of money (think expensive red sports cars here). The better approach would have been for the life insurance beneficiary designation to name the children’s trust as the beneficiary under the life insurance policy upon the death of the surviving parent. 

It’s also very important that you understand the tax consequences of your beneficiary designations. For example, if you designate your spouse as your beneficiary under your IRA, your spouse will be able to take advantage of a tax-free rollover of the IRA account into his or her own IRA. On the other hand, if a beneficiary other than a spouse is designated, then the beneficiary will have to take mandatory distributions from the IRA, which in turn will be subject to income taxes. In addition, while the estate tax is in currently in flux, assets passing by beneficiary designation are generally subject to the estate tax in the same manner as any other asset.

The best approach is to carefully consider and integrate beneficiary designations as part of a well-designated estate plan.

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A handwritten will may still be valid in a state that doesn’t normally recognize them, if you have the right facts. 

Many states (let’s label it “State A”) recognize that a will executed in a foreign state (“State B”), pursuant to the laws of State B when executed, can also be valid in State A. For example, see ORS 112.255(1)(c) and RCW 11.12.020. This can come into play when you are dealing with states that recognize holographic (handwritten) wills, like California, and states that do not recognize such wills, such as Oregon and Washington.

So do not be dismissive about a holographic will. Where was it executed? Did it comply with the statutory requirements for a valid will in the state in which it was executed? 

Domicile is another important issue when looking at a will. Domicile is not as simple as where somebody owns a home. Domicile, generally, means the place where a person resides and intends to remain permanently to the exclusion of other locations. To determine if there is a change in domicile, generally courts look to: (1) the decedent’s residence; (2) the decedent’s intention to abandon the prior domicile; and (3) an intention to acquire a new one.   

The reason domicile is important is that State A may recognize that a will executed pursuant to the laws of a different state of the decedent’s domicile at the time of execution, or domicile at the time of the testator’s death, is still valid in State A. Oregon and Washington recognizes this approach. ORS 112.255(1)(b); RCW 11.12.020. It’s important to note that it’s not an “and” test, it’s an “or” test, so look at both options, if applicable.  

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Now that Congress has repealed the estate tax for all or some portion of 2010, Oregon married couples need to rexamine whether or not their estate plan will work as they intended. 

For any couple with a net worth over $1 million, it is common to have a tax plan which divides the marital property when the first spouse dies. 

These plans typically provide that the portion of the decedent’s estate that is exempt from estate tax will pass to pass to a tax exempt trust, often called the “credit shelter trust” and the balance passes to the surviving spouse or a marital trust. In situations with children from a prior marriage, it is very common for the beneficiaries of the credit shelter trust to include the children from a prior marriage as beneficiaries; whereas, the assets passing to the surviving spouse will not include those children.

For example, if the first spouse died in 2009 with a $5 million estate, $3.5 million would be transferred to the credit shelter trust, because that was the amount that was exempt from federal estate taxes, and the $1.5 balance will be transferred to the surviving spouse or placed in a trust for the benefit of the surviving spouse. 

However, if the first spouse dies in 2010, while the repeal is in effect, all of the first spouse’s estate will pass either to the credit shelter trust or to the marital trust, depending on the wording in the estate plan document. If there are children from a prior marriage, it will be important to know how the estate will be split. If all of the decedent’s estate passes to the surviving spouse, then the children’s shares may be significantly reduced. However, if the children are the sole beneficiaries or co-beneficiaries of the credit shelter trust, this could significantly reduce the amount of assets available to the surviving spouse. 

Further complicating this issue are the following:

• Oregon’s Inheritance tax exemption of $1 million significantly complicates the trust allocations and the beneficiaries who may inherit trust property.
• The federal income tax carryover basis rule changes apply to 2010 Oregon estates which may cause an unexpected income tax when inherited property is sold.
• 2010 estates over $1.3 million will have to file an informational return with the IRS

Because of the 2010 law changes, every couple with a net worth in excess of $1 million should contact their estate planning attorney to review their current plan to determine how their estate would be handled if a spouse died in 2010 while the federal estate tax is repealed.

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