Probate and Trust Administration Essentials · 2020-07-21 · Billy Newsome practices in the areas of trust and estate administration, wealth transfer planning, taxation and exempt

presented by

The South Carolina Bar Continuing Legal Education Division

Probate and Trust Administration Essentials

20-19

Friday, July 24, 2020

http://www.scbar.org/CLE

SC Supreme Court Commission on CLE Course No. 205213ADOE

Table of Contents

Agenda ...................................................................................................................................................3 Speaker Biographies .............................................................................................................................4 Pre-Administration and Considerations in Opening the Estate ....................................................... 7 Catherine H. Kennedy Representing a Fiduciary: Ethics in Estate Administration ............................................................13 Scott W. Hutto Estate Administration ..........................................................................................................................25 Catherine H. Kennedy Trust Administration ............................................................................................................................49 J. Aaron Nelson, Jr. Post-Mortem Tax Issues .......................................................................................................................68 William G. Newsome, III Special Probate and Trust Situations ..................................................................................................92 J. Aaron Nelson, Jr., William G. Newsom, III

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Probate and Trust Administration

Essentials

Friday, July 24, 2020

8:30 a.m. Registration

8:55 a.m. Welcome and Opening Remarks Catherine H. Kennedy

Turner Padget Graham & Laney, PA

9:00 a.m. Pre-Administration and Considerations in Opening the Estate Catherine H. Kennedy

9:45 a.m. Representing a Fiduciary: Ethics in Estate Administration

Scott W. Hutto

Hutto Law Firm, PA

10:15 a.m. Break

10:30 a.m. Estate Administration

Catherine H. Kennedy

11:45 a.m. Lunch

12:15 p.m. Estate Administration (Continued) Catherine H. Kennedy

1:15 p.m. Trust Administration J. Aaron Nelson, Jr.

The Nelson Law Firm

2:00 p.m. Break

2:15 p.m. Post-Mortem Tax Issues William G. Newsome, III

Newsome Law

3:00 p.m. Special Probate and Trust Situations J. Aaron Nelson, Jr.

William G. Newsome, III

4:15 p.m. Panel Discussion (General discussion of how panel members operate their probate practice)

4:45 p.m. Adjourn

Estate Planning Essentials

SPEAKER BIOGRAPHIES (by order of presentation)

Scott W. Hutto

Hutto Law Firm (course planner)

Scott W. Hutto is the sole shareholder of Hutto Law Firm, P.A., located in Georgetown, South Carolina. Scott practices in the areas of estate planning, probate administration, probate litigation and corporate planning. Scott received his B.A. degree, cum laude, from Wofford College in 1991 and his J.D. degree from the University of South Carolina in 1998. He is a member of the American Bar Association, the South Carolina Bar and the Georgetown County Bar. In 2005, Scott was initially certified as a Specialist in Estate Planning and Probate Law by the South Carolina Supreme Court and was re-certified in 2015. Scott is also a Fellow of the American College of Trust and Estate Counsel (ACTEC). He has served two terms as a member of the Estate Planning and Probate Law Specialization Advisory Board, and he is a frequent speaker on the topics of estate planning and probate administration. Scott is active in his community and is Co-chair of Georgetown Bridge to Bridge ½ Marathon Committee and a board member of the Tidelands Community Hospice Foundation. Scott is a past board member of the following organizations: Probate, Estate Planning and Trust Section of the South Carolina Bar, Georgetown County Board of Education, Waccamaw Community Foundation, Friendship Place, Freedom for Kids Playground, Arial, A Ministry of Proclamation and All Saints Church, Pawleys Vestry. He is a member of Prince George, Winyah Church. Before attending law school, Scott served four years as an Air Defense Officer in the United States Army. Scott has been married to his wife, Laura, for Twenty-seven years, and they have two children.

Catherine H. Kennedy Turner Padget Graham & Laney, PA

(course planner)

Catherine Kennedy is a certified specialist in Estate Planning and Probate Law, practicing with the firm of Turner Padget Graham & Laney, PA., in its Columbia office. She is a past chair of the Probate, Estate Planning and Trust Section of the Bar and was the first recipient of the Wilkins Award from the Section for meritorious service to the Bar. From 1987 to 1999, she served as the Richland County Probate Judge. Ms. Kennedy frequently testifies before legislative committees on changes in South Carolina probate and trust law, and serves as an expert witness in probate matters. She served on the committee studying the Uniform Trust Code, which resulted in the enactment of the South Carolina Trust Code in 2005. She also chaired the Bench/Bar committee that recommended changes to the South Carolina Probate Code, which became effective on January 1, 2014, and the current changes to the Power of Attorney provisions of the S.C. Probate Code effective January 1, 2017.

Catherine Kennedy is certified as a civil court mediator and arbitrator and served on the task force to draft and implement the pilot mediation program in the probate courts. She also assisted in drafting Probate Court Rule 5, which provides for permanent mediation in the Probate Courts. She is currently member of the Board of Governors of the SC Bar. Ms. Kennedy is a fellow of the American College of Trust and Estate Counsel, is listed in Best Lawyers in America--Trust and Estates, and has been named a South Carolina Super Lawyer in Estate and Trust Litigation. She is currently a member of the South Carolina Bar’s House of Delegates and the Executive Council of the Senior Lawyers’ Division of the SC Bar.

J. Aaron Nelson, Jr. The Nelson Law Firm

J. Aaron Nelson, Jr. is a 2008 Cum Laude graduate of The Citadel, with a Bachelor of Science in Business Administration: Accounting. He then attended The Charleston School of Law where he received his Juris Doctor Magna Cum Laude in 2011. In 2012 he graduated from the University of Florida Levin College of Law with a Masters of Laws in Taxation. Mr. Nelson is the owner of The Nelson Law Firm of Bluffton, LLC and is “of counsel” at Merline & Meacham, P.A. in Greenville. He frequently speaks around the state on various estate planning, probate, trust, and tax topics. He has recently published two articles in the South Carolina Lawyer – one article on trust decanting and another on individual retirement accounts. His practice focuses predominantly on estate planning, probate administration, business formation and representation of clients before the Internal Revenue Service and South Carolina Department of Revenue. He and his wife, Elizabeth, live in Bluffton and have a daughter, Annie, and two English labs, Ashley and Cooper.


Newsome Law

Billy Newsome practices in the areas of trust and estate administration, wealth transfer planning, taxation and exempt organizations. He is a Certified Specialist in the Areas of Estate Planning and Probate Law by the South Carolina Supreme Court. He represents individual and corporate fiduciaries in complex estate and trust administration. Fiduciaries and beneficiaries also call on Billy to assist them with estate and trust litigation matters. He also assists high net worth individuals and business owners with structuring their estate plans and business succession plans. Billy also represents tax exempt organizations and assists them with complying with the myriad rules applicable to 501(c)(3) organizations. Additionally, he provides general tax and business advice to individuals and businesses.

A native of Hartsville, South Carolina, Billy received a B.S. degree in Economics from Francis Marion College, attending as a Francis Marion Scholar. He received his law degree from the University of South Carolina School of Law, where he was a Roy Webster Scholar and a member of the Order of the Wig and Robe. He also received a Master of Laws in Taxation from the University of Florida School of Law. Billy and his wife, Kim, and their daughters, Ann and Emily, are active members of Eastminster Presbyterian Church in Columbia.

Pre-Administration and Considerations in Opening the Estate


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PROBATE ADMINISTRATION IN SOUTH CAROLINA

Presented by

Catherine H. Kennedy. Esq.Certified Specialist in Estate Planning and Probate Law

TURNER PADGET GRAHAM & LANEY, PA

Pre-Probate

Safety deposit box

Examined by

Person named in court order

Spouse

Parent

Adult descendent

Executor named in copy of will

Obtain

Insurance policies by named beneficiary

Will by named executor

Deed to burial plot to requester

Burial instructions to requester

S.C. Code Section 34-19-50; Form 480ES

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Pre-Probate

Named PR in Will may

Protect property of the estate

Carry out written instructions re disposition of body and burial arrangements

Ratify acts of others

Section 62-3-701

WILL

Probate v. Non-Probate Assets

PROBATE ASSETS

NON PROBATE ASSETS

Decedent BeneficiariesINTESTACY

Assets in Trusts

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Considerations Prior to Administration

1. Alternatives to Full Administration

Will Filed only (Form 306ES)

No assets

Will placed on record

Will Probated only (Form 300ES)

No assets

Will actually declared valid

Information provided to heirs and devisees (Form 305ES)


Small Estate Affidavit (Form 420ES) Net value of assets (deducting liens and

encumbrances) is less than $25,000

No real property

30 days after death

No application/petition for appointment of PR

Assets delivered by possessor to successors

Successor includes person paying funeral expenses

Successors liable to PR or creditors

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2. Ten year limitation for commencement of administration or probate (§62-3-108)

Petition to determine heirs

3. Summary Administration--Sole Heir/Devisee = PR

Consider renunciation of right to administer

Consider disclaimers

Consider private agreements under §62-3-912


4. Formal Probate

Summons and Petition Required

Responsive pleading opposing probate required See §62-3-404; §62-1-304

5. Creditor claims

Claims are barred after one year (§62-3-803)

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6. Proof of Death

See Section 62-1-507

5-year absence

presumption of death at the end of the period

7. Domicile

County

State

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Representing a Fiduciary: Ethics in Estate Administration

Scott W. Hutto

PROBATE AND ESTATE PLANNING PRACTICE ESSENTIALS

July 24, 2019


Scott W. Hutto

Certified Specialist in Estate Planning and Probate Law Fellow of the American College of Trust and Estate Counsel

PO Box 556 | Georgetown, SC 29442

521 Highmarket Street | Georgetown, SC 29440 843-545-5250 | Fax 843-545-5251

[email protected]

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By

Scott W. Hutto, Esq.

Hutto Law Firm, P.A.

All attorneys licensed to practice in South Carolina are subject to the Rules of

Professional Conduct set forth in Appellate Court Rule 407. While a complete review of all of

the Rules is beyond the scope of this outline, this outline is designed to highlight certain rules

that are particularly important to the probate practitioner.

1. Rule 1.1. Competence

"A lawyer shall provide competent representation to a client. Competent representation

requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the

representation."

Legal Knowledge and Skill: The comment [1] to Rule 1.1. state that one's legal

knowledge and skill in a particular matter are determined by various factors including:

complexity and specialized nature of the matter; general experience of the lawyer; lawyer's

training and experience in the field in question; preparation and study given to the matter by the

attorney; and whether it is feasible to refer the matter to or associate with an attorney with

competence in the field. Comment [4] states that a "lawyer may accept representation where the

requisite level of competence can be achieved by reasonable preparation."

Maintaining Competence: Pursuant to comment [6] a lawyer must "stay abreast of

changes in the law and in the practice, engage in continuing study and education and comply

with all continuing legal education requirement to which the lawyer is subject" to maintain

requisite knowledge and skill.

Practice Pointer: To comply with Rule 1.1., the probate practitioner should consider his or her

knowledge in the following areas:

A. South Carolina Probate Code

B. South Carolina Trust Code

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C. Internal Revenue Code

D. Probate Court Forms

E. Probate and Trust Litigation

2. Rule 1.2. (c) Scope of Representation

"A lawyer may limit the scope of the representation if the limitation is reasonable under

the circumstances and the client gives informed consent."

Comment [11] to Rule 1.2. states that when "a client is a fiduciary, the lawyer may have

special obligations in dealings with beneficiaries. However, under S.C. Code Ann. §62-1-109,

the representation of a fiduciary does not necessarily create any duties or obligations to other

interested parties."

§ 62-1-109. Duties and obligations of lawyer arising out of relationship

between lawyer and person serving as a fiduciary

Unless expressly provided otherwise in a written employment agreement, the creation of

an attorney-client relationship between a lawyer and a person serving as a fiduciary shall

not impose upon the lawyer any duties or obligations to other persons interested in the

estate, trust estate, or other fiduciary property, even though fiduciary funds may be used

to compensate the lawyer for legal services rendered to the fiduciary. This section is

intended to be declaratory of the common law and governs relationships in existence

between lawyers and persons serving as fiduciaries as well as such relationships hereafter

created.

Practice Pointer: Always use a representation agreement that states the capacity in which you

represent the client i.e. "I will be representing you in your capacity as Personal Representative of

the Estate, and not in your individual capacity or as an estate beneficiary." Also, when

communicating with beneficiaries, make it clear that you represent the fiduciary in his or her

fiduciary capacity and that you do not represent the beneficiaries.

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3. Rule 1.3 Diligence

A lawyer shall act with reasonable diligence and promptness in representing a client.

Practice Pointer: Establish a reasonable timetable for the completion of the various tasks

involved in the engagement and who is responsible for each task.

4. Rule 1.4. Communication

(a) A lawyer shall:

(1) promptly inform the client of any decision or circumstance with respect to

which the client's informed consent, as defined in Rule 1.0(f), is required by these Rule;

(2) reasonably consult with the client about the means by which the client's

objectives are to be accomplished;

(3) keep the client reasonably informed about the status of the matter;

(4) promptly comply with reasonable requests for information; and

(5) consult with the client about any relevant limitation on the lawyers

conduct when the lawyer knows that the client expects assistance not permitted by the Rules of

Professional Conduct or other law.

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the

client to make informed decisions regarding the representation.

Practice Pointer: For the average non-taxable estate, the probate process takes about one

year to complete. Taxable estates may take much longer depending on how prompt the IRS is

with their closing letter. However, much of that time is simply waiting for the creditor's claim

period to run, or with a taxable estate, waiting on the IRS. Clients tend to forget this and become

anxious to close the estate. Take the time to monthly call or write the client so that they know

the status of the estate or trust, even if the communication is to let them know you are still

waiting. Also, copy clients on court filings and estate related communications.

5. Rule 1.5. Fees

(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee

or an unreasonable amount for expenses. The factors to be considered in determining the

reasonableness of a fee include the following:

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(1) the time and labor required, the novelty and difficulty of the questions

involved, and the skill requisite to perform the legal services properly;

(2) the likelihood that the acceptance of the particular employment will

preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation and ability of the lawyer or lawyers performing

the services; and

(8) whether the fee is fixed or contingent

(b) The scope of the representation and the basis or rate of the fee and expenses for

which the client will be responsible shall be communicated to the client, preferably in writing,

before or within a reasonable time after commencing the representation, except where the lawyer

will charge a regularly represented client on his same basis or rate. Any changes in the basis or

rate of the fee or expenses shall be communicated to the client, preferably in writing.

(c) [Intentionally omitted]

(d) [Intentionally omitted]

(e) [Intentionally omitted]

Practice Pointers: SC Probate Code §62-3-721 allows interested parties to petition the court

concerning the propriety of employment and reasonableness of compensation of attorneys,

accountants, and other professionals employed by the personal representative. SC Trust Code

§62-7-201 and §62-7-805 also allow interested parties to petition the court to review propriety of

employment and reasonableness of compensation of attorneys, accountants, and other

professionals employed by a trustee. As a result, lawyers representing fiduciaries should have

detailed, written fee agreements and should keep detailed billing statements to justify these

expenses. However, Rule 1.6 requires the lawyer to maintain client confidentiality. Therefore,

seek client approval in writing before submitting detailed invoices to a court for approval.

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6. Rule 1.6. Confidentiality of Information (a) A lawyer shall not reveal information relating to the representation of a client

unless the client gives informed consent, the disclosure is impliedly authorized in order to carry

out the representation or the disclosure is permitted by paragraph (b).

(b) A lawyer may reveal information relating to the representation of a client to the

extent the lawyer reasonably believes necessary:

(1) to prevent the client from committing a criminal act;

(2) to prevent reasonably certain death or substantial bodily harm;

(3) to prevent the client from committing a crime or fraud that is reasonably

certain to result in substantial injury to the financial interests or property of another and in

furtherance of which the client has used or is using the lawyer's services;

(4) to prevent, mitigate or rectify substantial injury to the financial interests or

property of another that is reasonably certain to result or has resulted from the client's

commission of a crime or fraud in furtherance of which the client has used the lawyer's services;

(5) to secure legal advice about the lawyer's compliance with these Rules;

(6) to establish a claim or defense on behalf of the lawyer in a controversy

between the lawyer and the client, to establish a defense to a criminal charge or civil claim

against the lawyer based upon conduct in which the client was involved, or to respond to

allegations in any proceeding concerning the lawyer's representation of the client; or

(7) to comply with other law or a court order.

Practice Pointers:

- As the attorney for a Personal Representative or Trustee, you will be provided with

substantial amounts of confidential information concerning financial and family issues of the

decedent. If you did the planning for the Decedent, you may also have confidential information.

This information should remain confidential, and it is critical that your staff understand this

obligation as well. This information should be guarded whether or not the lawyer is retained.

See Rule 1.7.

- Query: What to do with old Wills or copies of old Wills?

- How do you transmit data, i.e. tax returns, SSNs, bank or brokerage information?

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7. Rule 1.7. Conflicts of Interest

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the

representation involves a current conflict of interest. A current conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client;

or

(2) there is a significant risk that the representation of one or more clients will

be materially limited by the lawyer's responsibilities to another client, former client or a third

person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph

(a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide

competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client

against another client represented by the lawyer in the same litigation or other proceedings

before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.

Comment [1] to Rule 1.7 states that "[l]oyalty and independent judgment are

essential elements to the lawyer's relationship with the client."

Comment [8] to Rule 1.7. states that even "where there is no direct adverseness, a

conflict of interest can exist if there is significant risk that a lawyer's ability to consider,

recommend or carry out an appropriate course of action for the client will be materially limited

as a result of the lawyer's other responsibilities or interests.

Practice Pointers:

- Establish of system to check conflicts

- Be careful in multi-generational planning and subsequent estate administration.

- Do not represent a person individually (or as a beneficiary) and also in his or her

fiduciary capacity.

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- Do not engage yourself to do work for an estate in which you are the fiduciary

and are being compensated as such.

- Avoid drafting wills where you are also a beneficiary.

- If you drafted the will and could be called as a witness in a contest of the will,

Rule 3.7 (Lawyer as a Witness) probably prevents you from representing a party

in the action.

8. Rule 1.9. Duties to Former Clients

(a) A lawyer who has formerly represented a client in a matter shall not thereafter

represent another person in the same or a substantially related matter in which that person's

interests are materially adverse to the interests of the former client unless the former client gives

informed consent, confirmed in writing.

(b) A lawyer shall not knowingly represent a person in the same or a substantially

related matter in which a firm with which the lawyer formerly was associated had previously

represented a client

(1) whose interests are materially adverse to that person; and

(2) about whom the lawyer had acquired information protected by Rules 1.6

and 1.9(c) that is material to the matter; unless the former client gives informed consent,

confirmed in writing.

(c) A lawyer who has formerly represented a client in a matter or whose present or

former firm has formerly represented a client in a matter shall not thereafter:

(1) use information relating to the representation to the disadvantage of the

former client except as these Rules would permit or require with respect to a client, or when the

information has become generally known; or

(2) reveal information relating to the representation except as these Rules

would permit or require with respect to a client.

Practice Pointers:

- Establish of system to check conflicts

- Be careful in multi-generational planning and subsequent estate administration

- Prenups, creditor claims, heir disputes, will contests, etc?

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8. Rule 1.14. Client with Diminished Capacity (a) When a client's capacity to make adequately considered decisions in connection

with a representation is diminished, whether because of minority, mental impairment or for some

other reason, the lawyer shall, as far as reasonably possible, maintain a normal client-lawyer

relationship with the client.

(b) When the lawyer reasonably believes that the client has diminished capacity, is at

risk of substantial physical, financial or other harm unless action is taken and cannot adequately

act in the client's own interest, the lawyer may take reasonably necessary protective action,

including consulting with individuals or entities that have the ability to take action to protect the

client and, in appropriate cases, seeking the appointment of a guardian ad litem, conservator or

guardian.

(c) Information relating to the representation of a client with diminished capacity is

protected by Rule 1.6. When taking protective action pursuant to paragraph (b), the lawyer is

impliedly authorized under Rule 1.6(a) to reveal information about the client, but only to the

extent reasonably necessary to protect the client's interests.

Practice Pointers:

- It is fairly common to have a spouse named as the fiduciary - but there may be questions

about the spouse’s capacity to serve?

- To extent possible, an incapacitated client should be treated as the client.

9. Rule 2.1 Advisor

In representing a client, a lawyer shall exercise independent professional judgment and

render candid advice. In rendering advice, a lawyer may refer not only to law but to other

considerations such as moral, economic, social and political factors, that may be relevant to the

client's situation.

Practice Pointer: - During the administration of an estate, it is common for the Personal Representative to

ask a variety of questions that are not “legal” questions, or the advice sought may cross

into a variety of areas that are not limited to the law. For example, communications

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within a family, sale of estate assets, investment of estate or trust assets, timing of

distributions, and filing of tax returns. The attorney will need to address these questions

from time to time, but should be careful not to give advice that should be provided by

someone with special skills in the particular field.

10. Rule 4.3. Dealing with Unrepresented Person

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer

shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably

should know that the unrepresented person misunderstands the lawyer's role in the matter, the

lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give

legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer

knows or reasonably should know that the interests of such a person are or have a reasonable

possibility of being in conflict with the interests of the client.

Practice Pointer: Always inform all parties that you represent the Personal Representative in

his or her fiduciary capacity, and that you do not represent the beneficiaries.

11. Rule 5.5. Unauthorized Practice of Law; Multijurisdictional Practice of Law

(a) A lawyer shall not practice law in a jurisdiction in violation of the regulation of

the legal profession in that jurisdiction or assist another in doing so.

(b) A lawyer who is not admitted to practice in this jurisdiction shall not:

(1) except as authorized by these Rules or other law, establish an office or

other systematic and continuous presence in this jurisdiction for the practice of law; or

(2) hold out to the public or otherwise represent that the lawyer is admitted to

practice law in this jurisdiction.

(c) A lawyer admitted in another United States jurisdiction, and not disbarred or

suspended from practice in any jurisdiction, may provide legal services on a temporary basis in

this jurisdiction that:

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(1) are undertaken in association with a lawyer who is admitted to practice in

this jurisdiction and who actively participates in the matter;

(2) are in or reasonably related to a pending or potential proceeding before a

tribunal in this or another jurisdiction, if the lawyer, or a person the lawyer is assisting, is

authorized by law or order to appear in such proceeding or reasonably expects to be so

authorized;

(3) are in or reasonably related to a pending or potential arbitration,

mediation, or other alternative dispute resolution proceeding in this or another jurisdiction, if the

services arise out of or are reasonably related to the lawyer's representation of an existing client

in a jurisdiction in which the lawyer is admitted to practice and are not services for which the

forum requires pro hac vice admission; or

(4) are not within paragraph (c)(2) or (c)(3) and arise out of or are reasonably

related to the lawyer's representation of an existing client in a jurisdiction in which the lawyer is

admitted to practice.

(d) A lawyer admitted in another United States jurisdiction, and not disbarred or

suspended from practice in any jurisdiction, may provide legal services in this jurisdiction that:

(1) are provided to the lawyer's employer or its organizational affiliates and

are not services for which the forum requires pro hac vice admission; or

(2) are services that the lawyer is authorized to provide by federal law or other

law of this jurisdiction.

Practice Pointers:

- As the attorney for a fiduciary, the attorney should inform the client of limitations related

to their ability to practice across state lines and the possible need to associate counsel in other

jurisdictions. It is common to have estate and trust property held in various states.

*** Finally, the South Carolina Bar website www.scbar.org has a link to a searchable

database of Ethics Committee opinions which can be very helpful.

Estate Administration


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Full Administration- Step 1Deliver the Will and Have PR Appointed

1. Deliver original will to the court within 30 days from knowledge of death (§62-2-901)

Persons who intentionally/fraudulently destroy, suppress or conceal or fail to deliver is liable for damages, and

Persons, after being ordered to deliver will, are subject to penalty for contempt of court

Full Administration - Step 1Deliver the Will and Have PR Appointed

2. Open the estate Proof of death Application/Petition (Form 300ES) Bond (Form 340ES and Form 341ES)

Not required if:• PR named in Will• PR is sole heir or devisee• PR is Bank or trust company• PR is State agency• All heirs and devisees waive (Form 344ES)

Filing fee $25 assets up to $5,000 $45 assets up to $20,000 $67.50 assets up to $60,000 $95 assets up to $100,000, then percentage

Notice to creditors’ fee

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Full Administration - Step 1Deliver the Will and Have PR Appointed

3. Give information to devisees and heirs (Form 305ES)

30 days from appointment

Address is reasonably available

Section 62-3-705

4. File proof of delivery (Form 120PC)

Role of Personal Representative

Duty to abide by terms of effective will and SC Probate Code

Duty of impartiality to beneficiaries and creditors

Duty to administer estate in accordance with rights of claimants, surviving spouse, minor or pretermitted children

Duty to allow or disallow claims and to pay allowed claims

Duty to act in best interests of successors to the estate

Duty under federal and SC law to file returns

Duty to take possession or control of decedent's property

Duty to inventory and value probate property

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Duty to provide list of nonprobate property within 90 days after demand by interested person (Form 327ES)

Duty to take all steps reasonably necessary for management, protection and preservation of estate

Duty to act in accordance with “prudent investor” act (Section 62-7-933):

". . . Invest and manage assets as a prudent investor would by considering the purposes , terms, distribution requirements and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill and caution."

Duty to settle and distribute estate expeditiously and efficiently consistent with best interests of estate


Power to sell personal property valued $10,000 or less unless Will allows or court approves sale of property with greater value

Power to sell real property if authorized in Will or court order

Power to satisfy written pledges

Power to enter into leases but not for a term extending beyond administration

Power to access a catalogue of the decedent’s electronic communications and to access the communications themselves if provided in the will (See UFADAA Title 62, Article 2, Part 10)

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Power to retain assets owned by decedent, including those in which the PR is personally interested

Power to distribute assets in kind

Power to employ professionals, agents and advisors even if associated with the PR

Power to insure assets and the PR

Power to compromise obligations owing to the estate

With court approval, power to effect compromises for WD, and claims surviving decedent’s death

Full Administration - Step 2Gather and Appraise Assets

1. Obtain certificates of appointment (Form 141PC)

2. Obtain tax identification number (IRS Form SS-4)

3. Open estate account

4. File Inventory and Appraisement (Form 350SF or LF)

90 days from appointment

Assets owned on date of death

Valued as of date of death

Pay additional fees, if any

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Probate Assets:

• A - Real estate

• B - Stocks and bonds

• C - Cash and bank accounts

• D1 - Life Insurance with no beneficiary

• F- Miscellaneous personal property

• I - Retirement accounts with no beneficiary

G, H, I listed on I&A only if payable to the estate


Non-Probate Assets:

• D2 - Life Insurance with beneficiary

• E – JTROS property

• G - Lifetime transfers

• H – Assets subject to a power of appointment

• I -- Retirement accounts with beneficiary

Interested persons may request disclosure of non-probate property (Form 327ES); PR has 90 days to provide list of known non-probate assets; PR files Proof of Delivery with court (Form 125ES)

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5. Ancillary Administration

Other county (nothing required by law)

Other state

6. Determine what to do with assets

Considerations set out in §62-3-906 and §62-7-933

Distribute

Sell—Court order needed?

Retain

7. File decedent’s final income tax return

Full Administration - Step 3Determine and Pay Debts and Expenses

1. Notify creditors (§62-3-801)

Must publish notice to creditors (Form 370ES)

Once a week for 3 weeks

Newspaper of general circulation in county

Not required if PR appointed after 1 year from death

May give written notification (Form 376ES)

By mail

By other delivery

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2. Consider claims presented

Is it proper?

Valid liability

Format (Form 371ES REQUIRED)

• Writing

• Name and address of claimant

• Basis

• Amount claimed

Filed with the court (required)

Filed with the PR (optional)

Not barred by statute of limitations

• Limitations period suspended for 8 months after death


Is it timely filed?

Pre-death claims-- earlier of:

− 8 months from 1st publication (unknown)

− 1 year from date of death (known)

− 60 days from written notification but at least 8 months

post-death claims--

− 8 months after performance due by PR if contract

− 8 months after claim arises if other claim

EXCEPT

− Secured creditors to extent of security

− Insured claims to extent of liability insurance

− PR, attorney or accountant claims for post death expenses

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3. Allow or disallow claims (Form 372ES)

by later of

60 days after presentment

14 months after date of death

Allowance does not imply funds sufficient for payment

Judgment in other court is an allowance; creditor must file judgment with probate court


4. Pay allowed claims

What priority? (§62-3-805)

Administrative and funeral expenses

Debts and taxes with priority under federal law

Last illness medical, hospital and personal care expenses

Debts and taxes with priority under State law including Medicaid, in priority order

General debts

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When to pay?

Funds available

Sale of real estate or personal property

No later than 14 months from date of death

What assets to use (abatement of assets)? (§62-3-902)

Intestate property

Residuary devises

General devises

Specific devises

Non-probate property (accounts and trusts)


What amount should be paid?

Pro-rata distribution in same class except preferred state law debts paid in priority order (§62-3-805)

Allowed amount less value of security (§62-3-809)

Allowed claims bear interest at legal rate (9.5% for 2019) beginning later of 14 months from death or last date to file claims, or per contract (§62-3-806)

Contingent and Unliquidated claims must be addressed (§62-3-810)

Offset allowed (§62-3-811)

Personal liability of PR

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Full Administration - Step 3Determine & Pay Debts and Expenses

5. File Estate Tax Return and pay taxes due

No SC Estate Tax beginning 1/1/2005

Federal threshold $5,000,000 if death in 2011;

$5,120,000 in 2012;

$5,250,000 in 2013;

$5,340,000 in 2014;

$5,430,000 in 2015;

$5,450,000 in 2016;

$5,490,000 in 2017;

$11,180,000 in 2018;

$11,400,000 in 2019

$11,580, 000 in 2020

File to elect portability of DSUE

Full Administration - Step 3Determine & Pay Debts and Expenses

6. File interim fiduciary income tax return (IRS Form 1041) if receipts exceed $600 and pay taxes due

Consider § 645 Election if Revocable Trust

6. If required to file Form 706, file Form 8971 and Schedule A with IRS and send out Schedule A to beneficiaries

Basis Consistency Statute--IRC§1014(f)

Reporting Requirements--IRC §6035

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Basis Consistency

Applicable if:

Filing of Form 706 is required (not elective filings)

Property receives stepped-up basis

Property must increase estate tax liability--so marital & charitable deduction property is excluded from consistency requirement but not reporting

Exceptions to Form 8971

Cash

Income in Respect of Decedent (IRD)

Household & Personal Effects valued ≤ $3,000

Assets disposed of by estate

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Requirements

Executor must

File Form 8971 with IRS

File Schedule A with IRS reporting basis of property on Form 706 and beneficiary receiving such property

Send Schedule A to all persons who could receive property (including spouses and charities)

Due 30 days after earlier of due date or date of filing 706 (10 months or 16 months from date of death)

Examples for Schedule A

Executor must list asset beneficiary is going to/could receive

Monetary Bequests – if Executor can satisfy in kind

Residuary Devises – all assets that could be used to satisfy

Pourover to Revocable Trust – Schedule A goes to trustee not beneficiary

Life Estate – sent to life tenant & to remainder beneficiary as though life tenant died

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Errata

No Supplemental Form 8971 required unless:

Contingency happens & negates beneficiary’s interest

Unknown beneficiary later located

New beneficiary identified

Reported information is incorrect or incomplete (e.g., additional property discovered)

Effective Date

Initially effective for Estate Tax Returns filed after 7/31/2015

IRS delayed implementation to June 30, 2016, so applies to returns filed 7/1/2016 and later

Temporary & Proposed Regulations published 3/4/2016

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Effective Date

Initially effective for Estate Tax Returns filed after 7/31/2015

IRS delayed implementation to June 30, 2016, so applies to returns filed 7/1/2016 and later

Temporary & Proposed Regulations published 3/4/2016

Effect of Law

Basis is ≤: value on 706; or as determined by IRS in audit; or as determined by agreement with IRS; or as determined by court proceeding(Post-death adjustments still applicable)

If not reported, basis is $0

Beneficiary is subject to 20% penalty of under-reported gain

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Full Administration - Step 4Distribute Property & Close the Estate

1. Distribute Real Estate

File Deed of Distribution (Form 400ES)

Original to ROD or Clerk of Court with filing fee

Copy of recorded deed to probate court

Original recorded deed to devisee

2. Distribute Personal Property

In-kind distribution preferred (Form 446ES)

Value as of date of distribution

Pecuniary bequests satisfied in kind should be fairly representative of appreciation /depreciation


3. Obtain receipts (Form 401ES, Form 403ES)

4. File final fiduciary income tax return (IRS Form 1041) and pay any taxes due

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5. Summary Administration Closing (Form 421ES)

Two Types

Small Estate administration

Net value is $25,000 or less plus

• Exempt property (up to $25,000)

• Costs and Expenses of administration

• Reasonable funeral expenses

• Necessary last illness expenses

PR is sole heir or devisee (individually or as fiduciary)

PR sends Form 421ES to all unpaid creditors

PR sends Form 421ES and accounting to all distributees

Estate remains open for 1 year from date of death


6. Normal Closing Time Frame

Later of:

expiration of time for creditor to contest disallowance

all proceedings on claims have ended

90 days from receipt of last estate tax closing letter

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7. File closing documents

Application for Settlement (Form 412ES)

Accounting* (Form 361ES)

Proposal for Distribution* (Form 410ES)

Notice of Right to Demand Hearing* (Form 416ES)

Proof of delivery (Form 120PC) indicating copies sent to interested persons

Receipts (Form 401ES, 403ES)

* can be waived by interested persons (Form 364ES or Form 365ES)


8. Obtain Order Closing Estate (Form 413) and

Termination of Appointment (Form 414)

These forms are court forms only and are not found on the SC Judicial Center website, where the probate forms are located:

http://www.judicial.state.sc.us/sccourts

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Subsequent Administration

1. After-discovered property

2. Property not fully administered

3. Forms Required:

Form 334ES-Application/Petition

Form 350ES SQA-I&A

Form 337ES-Application for Settlement/ Accounting

QUESTIONS?

Catherine H. Kennedy. Esq.TURNER PADGET GRAHAM & LANEY PA

PO Box 1473 | Columbia, SC 292021901 Main Street, Suite 1700

Columbia, SC 29201803-227-4367 | Fax [email protected]

Catherine H. Kennedy. Esq.TURNER PADGET GRAHAM & LANEY PA

PO Box 1473 | Columbia, SC 292021901 Main Street, Suite 1700

Columbia, SC 29201803-227-4367 | Fax [email protected]

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Estate Administration Procedures/Probate Court Forms I. Filing/Probating of Will

A. Filing of Will for Record (Form 306ES)—just provides information

B. Application for Informal Probate (Form 300ES)—actually declares Will valid

II. Small Estates (less than $25,000)- See §62-3-1201

A. Complete Affidavit for Collection of Personal Property (Form 420ES)

B. Submit any other documentation requested

C. Probate Court will complete Order

D. Affidavit is presented to person in control of assets belonging to the decedent who

should distribute those assets in accordance with the Court’s Order

III. Normal Estate Administration

A. Opening the Estate

1. Complete Application for Informal Probate/Appointment (Form 300ES)

[This form is also used for a Petition for Formal Testacy and Appointment.

A Summons (Form SCCA 401PC) should be attached to a Petition]

a. Indicate in Paragraph 4a the named beneficiaries under the Will

b. Indicate in Paragraph 4b the names and addresses of Decedent's

heirs who were not included in the Will

c. Answer remaining questions

d. Sign verification and have notarized

e. Sign Acceptance on Page 6 if seeking appointment

2. Attach original Will and original Death Certificate to Application

3. Include Fees:

a. Based on total amount of probate assets, e.g.,

$20,000 to $59.999 = $67.50 $60,000 to $99,999 = $95.00

$100,000 + = $95 plus 1.5 %

of amount over $100,000 up to

600,000

$600,000 + $845.00 plus 2.5 %

of amount over $600,000

2

Confirm with Probate Court amount requested initially.

b. Publication fee - check with Probate Court

4. Include Statement of Value & Income for Purposes of Bond (Form 340ES)

and Fiduciary Bond (Form 341ES) or Waiver of Bond (Form 344ES) if

Intestate Estate

[Handbook for Probate Practitioners published by the Probate Section

of the SC Bar may be helpful in determining the requirements of each

probate court.]

5. Probate Court issues Fiduciary Letters and Certificates of Appointment

(Form 141ES) to evidence the appointment of the Personal Representative

6. Newspaper publishes Notice to Creditors once a week for three weeks and

files Certificate of Publication (Form 370ES) with Probate Court

B. Complete IRS Form SS-4 to obtain a tax identification number for the estate

C. Information to Heirs and Devisees (Form 305ES)

1. Complete form after Application is granted 2. Consider whether to write letter to accompany form/include Will 3. Mail form to all to people listed in 4(a) and 4(b) in the Petition

4. File with Probate Court as attachment to Proof of Delivery (see below).

D. Proof of Delivery (Form 120PC) 1. Complete form, sign and have notarized 2. Attach a copy of form that was delivered/sent 3. File with Probate Court.

E. Inventory and Appraisement

1. Determine whether to use the short form (Form 350ES-SF) or the long form

(Form 350ES-LF)

2 Insert values and assets as of date of death

2. Complete form, sign and have notarized

3. File with the Probate Court

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4. Provide a listing of known non-probate property within 90 days of demand by

an interested person (Form 327ES) and file Proof of Delivery with probate

court (Form 125ES)

F. Deal with Creditors

1. Provide Written Notice to Creditors (Form 376ES) to shorten claims period

2. Creditors file with the probate court a Statement of Creditor’s Claim (Form

371ES), which is now a mandatory form

3. PR must allow or disallow all claims in whole or in part by sending Notice of

Allowance/Disallowance Of Claim (Form 372ES) to the creditor and filing a

copy with a Proof of Delivery (Form 120PC) with the Probate Court

4. Obtain Release/Satisfaction of Claim (Form325ES) and file with probate

court; other forms of proof can be used

G. Transfer Real Estate

1. Complete Deed of Distribution (Form 400ES) by inserting the distributee and

the legal description

2. File original with Register of Deeds/Clerk of Court (depends upon the

county) with filing fee of $15 (as of 8/1/2019)

5. File copy of recorded deed with Probate Court

H. Transfer Personal Property

1. Complete Bill of Sale (DMV Form 4031) and reverse side of Certificate of

Title for vehicles and mobile homes. Provide a Certificate of Appointment to

the distributee

2. Distribute personal property (Form 446ES) and assign Intangibles and

Receivables

3. Obtain Receipt (Form 401ES or 403ES)

H. Accounting (Form 361ES) - unless waived (Form 364Es or 365 ES)

1. Interim Accounting may be needed if estate is open longer than one year

2. Complete form, sign and have notarized

4

3. File original with Probate Court

4. Mail a copy to all people listed in 4(a) and possibly 4(b) in the Petition

3. File Proof of Delivery with Probate Court

I. Closing Estate Under Summary Closing Procedure Under § 62-3-1203(b)

1. File Verified Statement to Close Estate (Form 421ES) with Probate Court

a. Personal Representative is sole beneficiary or sole heir--no

Accounting required

b. Net Probate Estate = $25,000 + exempt property ($25,000) and

priority claims (costs of administration, funeral expenses and

expenses of last illness)—Accounting required

2. Send Verified Statement and Accounting to Interested Parties, if any

3. File Proof of Delivery with Probate Court

J. Closing Estate Under Normal Procedure

1. Complete and file the Application for Settlement (Form 412ES) with the

Probate Court

2. Complete and file the following unless waived by all the interested parties

(Form 364ES is the waiver of the filing requirement; Form 365ES if the

waiver of filing and Receipt and Release):

a. Final Accounting (Form 361ES)

b. Proposal for Distribution (Form 410ES) if assets still remain in estate

c. Notice of Right to Demand Hearing (Form 416ES) if all interested

persons have not waived a hearing

(Interested persons can demand a hearing by using Form 113)

3. Complete and file the Proof of Delivery (Form 120PC) for all forms sent

4. File Receipts (Form 401ES or 403ES) or other evidence of transfer of assets

to distributees

5. Submit other documents requested by Probate Court

6. Probate Court issues Order Closing Estate (Form 413ES) and Termination of

Appointment (Form 414ES)

7. Make certain order releases any bond and send order to bonding entity

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IV. Reopening Estate

A. Application for Subsequent Administration (Form 334ES)

[This form is also used for a Petition for Subsequent Administration if the

proceeding must be formal. A Summons (Form SCCA 401PC) should be attached

to a Petition]

B. Complete Subsequent Administration Inventory (Form 350ES SQA)

C. Transfer assets and provide proof to Probate Court

D. File Application for Settlement & Accounting of Subsequent Administration

(Form 337ES)

E. Probate Court issues Termination of Appointment (Form 414ES)

Trust Administration

J. Aaron Nelson, Jr.

1

Presented by

J. Aaron Nelson, Jr. Esq.

Of Counsel, Merline & Meacham, P.A.

Owner, The Nelson Law Firm of Bluffton, LLC

Scenario 1

New clients, Bill and Connie, walk into your office and desire to execute revocable trusts. These trusts will provide that upon the death of the grantor, the assets in the grantor’s trust will be held in a trust for the benefit of the survivor.

Bill and Connie want the trusts to be as friendly to the trustee as possible and ask what provisions can be added to allow the trustee the most latitude?

Bill and Connie have heard that trusts can help avoid creditors. What rights do creditors have to the revocable trusts?

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Non‐Waivable Provisions

In general, the terms of a trust prevail over all “default” terms specified in the South Carolina Trust Code.

The following are provisions which are mandatory (prevail over terms of trust):

Requirements for creating a trust

Duty of good faith

Trust must be for the benefit of beneficiaries and have a lawful purpose

Effect of spendthrift provisions

Limitations on an attorney‐in‐fact

Power of the court to address trustee’s compensation

Effect of exculpatory terms

Others

Creditors’ Access to Trusts

In general, a beneficiary’s interest in a trust may be assigned to a creditor.

Exceptions to general rule:

Spendthrift provision, or

Discretionary trust provisions, even if ascertainable standard.

Exception to the exceptions – child support.

Self‐settled trusts are generally not protected.

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Scenario 2

Bill has just died and Connie comes into your office to see what she must do now.

Duty to Inform

Terms of the trust prevail (subject to duty of good faith).

While the Settlor is alive and the trust is revocable, the duty to inform is owed solely to the Settlor.

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Duty to Inform, continued…

A person who accepts trusteeship shall, within 90 days of the trust becoming irrevocable (or accepting trusteeship) inform the Qualified Beneficiaries of:

The existence of the trust

Identity of the Settlor

Trustee’s name, address, and phone number

Right to request a copy of the trust instrument

Right to request a copy of the Trustee’s report

A Trustee who has been requested by a beneficiary (not Qualified Beneficiary) to provide a copy of the trust instrument, may redact irrelevant portions.

Duty to Inform, continued…

Annually, upon termination of the trust, and upon resignation of the Trustee, the Trustee must provide a Trustee’s report to distributees, permissible distributees, and qualified beneficiaries who have requested a copy.

This report must include the information necessary to protect the beneficiaries’ interests, which may include:

Copy of tax return or bank and brokerage statements

Informal list of assets, values, and liabilities

Receipts and disbursements

Source and amount of Trustee’s compensation.

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Qualified Beneficiaries (§62‐7‐103(12))

"Qualified beneficiary" means a living beneficiary who, on the date the beneficiary's qualification is determined:

(A) is a distributee or permissible distributee of trust income or principal;

(B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subparagraph (A) terminated on that date, but the termination of those interests would not cause the trust to terminate; or

(C) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.

“Beneficiary” (§62‐7‐103(2))

"Beneficiary" means a person that:

(A) has a present or future beneficial interest in a trust, vested or contingent; or

(B) in a capacity other than that of trustee, holds a power of appointment over trust property; or

(C) In the case of a charitable trust, has the authority to enforce the terms of the trust.

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Scenario 3

Connie has gotten older and she would like her son to take over as trustee for her.

Connie is Trustee of her own revocable trust and the trust that Bill created for her.

Resignation of Trustee (§62‐7‐705)

Trust terms always prevail

Thirty days written notice to the qualified beneficiaries, Settlor if living, and all co‐trustees; or

Approval of court

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Appointment of Trustee (§62‐7‐704)

Trust terms always prevail

Vacancy is filled by:

Person designated in trust instrument

Unanimous agreement of qualified beneficiaries

Person appointed by court

Scenario 4

The trust for Connie that Bill created just isn’t working out. It required an institutional Trustee if Connie resigned.

What can be done?

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Jurisdiction of Probate Court

Non‐waivable mandatory provision.

All trust matters are formal.

Circuit courts have concurrent jurisdiction over certain matters (particularly those matters that involve third parties).

No continuing supervision – jurisdiction must be invoked.

Non‐judicial Settlement Agreement (§62‐7‐411)

“Interested persons” may enter into a binding non‐judicial settlement agreement with respect to only the following matters:

Approval of a Trustee’s report or accounting

Direction to a trustee to perform or restraint of a

Trustee from performing an administrative act

Grant the Trustee a necessary or desirable

administrative power

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Non‐judicial Settlement Agreement. Continued…

“Interested persons” may enter into a binding non‐judicial settlement agreement with respect to only the following matters (continued):

Resignation or appointment of a Trustee

Determination of a Trustee’s compensation

Transfer of principal place of administration (but

not governing law)

Liability of a trustee for an action related to the

trust.

Non‐judicial Settlement Agreement. Continued…

Note that a Non‐judicial Settlement Agreement for a trust is much narrower in scope than an Agreement Among Successors pursuant to Section 62‐3‐912.

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Modification of Irrevocable Trusts

Unanticipated circumstances

Uneconomic trust

Reformation

Modification to achieve settlor’s tax objectives

Equitable deviation

Consent of all beneficiaries (and settlor if available)

Combination and division

Unitrust conversion

Decanting

Unanticipated circumstances (§62‐7‐412)

Requires court involvement.

May modify administrative or dispositive terms, or terminate the trust if: Circumstances not anticipated by Settlor (such circumstances

may have been in existence at the time the trust was created, so long as the Settlor was not aware of them).

Modification or termination will further the purposes of the trust.

Must be made in accordance with Settlor’s probable intention.

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Unanticipated circumstances (§62‐7‐412)

May modify the administrative terms of a trust if continuation on its existing terms would be: Impracticable;

Wasteful; or

Impair the trusts administration.

Modification under this section (because it does not require beneficiary action) is not precluded by a spendthrift provision.

Uneconomic trust (§62‐7‐414)

Termination Without Court Approval

Requires trust value to be less than $100,000 and value of the trust property is insufficient to justify the cost of administration.

Requires notice to the qualified beneficiaries.

The definition of “qualified beneficiaries” is discussed above.

Note: notice is required, consent is not.

Trustee initiates the termination.

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Uneconomic trust (§62‐7‐414)

Modification

Requires court involvement.

No dollar limit.

May modify, terminate, remove a trustee, and appoint a new trustee if the value of trust property is insufficient to justify cost of administration.

Reformation to Correct Mistakes (§62‐7‐415)

Court involvement is required.

Terms may be unambiguous.

May conform the terms of the trust to the settlor’s intention.

Requires proof by clear and convincing evidence of what the settlor’s intention was and that the terms of the trust were affected by a mistake of fact or law.

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Modification to Achieve Settlor’s Tax Objectives(§62‐7‐416)

Court involvement is required.

May modify the terms of the trust to achieve the settlor’s tax objectives.

Not contrary to the settlor’s probable intention.

May be retroactive – but IRS not bound.

Equitable Deviation (§62‐7‐413)

Cy Pres

Applicable only to charitable trusts.

If the charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful

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Consent with Court Approval (§62‐7‐411)

Modification and Termination.

Requires consent of settlor and all

beneficiaries.

Note: not just “qualified beneficiaries.”

The modification or termination may be

inconsistent (if settlor consents) with a

material purpose of the trust.

Consent with Court Approval (§62‐7‐411)

Termination

Consent of all beneficiaries (but not settlor)

Court must conclude that continuance of the trust is

not necessary to achieve any material purpose of the

trust

Modification

Consent of all of the beneficiaries (but not settlor)

Court must conclude the modification is not

inconsistent with a material purpose of the trust

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Virtual Representation (§§62‐7‐301 through 304)

Must be no conflict of interest

Testamentary general power of appointment (defined)

Conservator may bind ward

Guardian may bind ward if no Conservator

Agent (including under a Durable Power of Attorney) may bind principal

Trustee may bind trust beneficiaries

Personal Representative may bind Estate and Estate beneficiaries

Parents may bind minor and unborn issue if no Conservator or Guardian

Person having substantially identical interest may bind unknown beneficiary

Combination and Division (§62‐7‐417)

After notice to the qualified beneficiaries

No court approval is required

Trustee initiates the action

Requires the division or combination

Not impair the rights of any beneficiary; or

Not adversely affect achievement of the purposes

of the trust

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Decanting

Ability to Decant

Terms of the Second Trust

Decanting Procedure

The Ability to Decant

In general, the ability to decant is fairly broad.

The terms of the original trust cannot prohibit decanting. S.C. Code § 62‐816A(a).

No court approval is required unless the trust expressly prohibits decanting. S.C. Code §62‐7‐816A(a). However, if the terms of the original trust expressly prohibit decanting, court approval may be granted pursuant to the provisions of S.C. Code § 62‐7‐816A(a).

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Restrictions on the Ability to Decant

The trustee may not decant if the trustee is a beneficiary of the original trust; however, the remaining trustees may act or the court may appoint a special fiduciary if no “independent” trustee is available. S.C. Code § 62‐7‐816A(e).

See definition of “beneficiary” above.

The Terms of Second Trust

The second trust may be created under a different (or the same) trust instrument. S.C. Code § 62‐7‐816A(c).

The trustees of the original trust and second trust may vary or may be the same. S.C. Code §62‐7‐816A(c).

The second trust cannot add a beneficiary who was not beneficiary of the original trust. S.C. Code § 62‐7‐816A(d)(1). However, a power of appointment may be helpful in adding a beneficiary. S.C. Code § 62‐7‐816A(d)(7).

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The Terms of Second Trust

The second trust can remove beneficiaries who were beneficiaries of the original trust (subject to S.C. Code § 62‐7‐816A(d)(6)). S.C. Code § 62‐7‐816A(a).

The second trust cannot accelerate a beneficiary’s interest (convert a remainder beneficiary to a current beneficiary). S.C. Code § 62‐7‐816A(d)(2).

Procedure for Decanting

The decanting must be made in an instrument in writing, signed and acknowledged by the trustee of the original trust. S.C. Code § 62‐7‐816A(g)(1).

The writing must set forth the manner of the exercise of the power, the terms of the second trust and the effective date. S.C. Code § 62‐7‐816A(g)(1).

The writing must be kept with the records of the original trust. S.C. Code § 62‐7‐816A(g)(1).

Notice to qualified beneficiaries. S.C. Code § 62‐7‐816A(g)(2).

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Post-Mortem Tax Issues


South Carolina Bar

Probate and Trust Administration Essentials

July 24, 2020


William G. Newsome III, J.D., LL.M.(Tax)

Certified Specialist in Estate Planning & Probate Law

NEWSOME LAW T A X | E S T A T E | T R U S T

1501 Main Street, Suite 601 | Columbia, SC 29201 803-218-9644 | Fax 803-205-0814

[email protected] WWW.NEWSOMELAWSC.COM

mailto:[email protected]

1

POST-MORTEM TAX ISSUES1

This outline is intended to provide an overview and highlight significant tax

issues affecting the estate and trust administration process. It is not

intended to be a complete review of all estate and trust tax issues as that is

beyond the scope of this outline and the intent for the course material.

When representing a personal representative or trustee in the administration

process, issues related to the taxation of the assets and income of the estate or trust must

be considered. Significant changes to the federal estate and gift tax laws in recent years

have caused many practitioners to believe small estates are exempt from the tax system.

This faulty assumption has created a trap for the unwary. It is extremely important that

the estate and probate practitioner become informed of the numerous income, estate, gift,

and generation skipping transfer tax issues that impact the estate plans they draft and the

estates and trusts they help to administer.

I. INCOME TAX ISSUES

a. Decedent’s Final Form 1040 Individual Income Tax Return.

i. The Personal Representative is required to file any income tax

returns of the decedent that are not filed as of the decedent’s date of

death, except for joint returns in certain circumstances.2

ii. The Personal Representative has the option of filing a joint final 1040

for a decedent who was married on the date of death. The surviving

spouse can also file a joint income tax return on behalf of a decedent.

Coordination between the Personal Representative and the surviving

spouse is therefore important.

1 Portions of this outline were taken from a similar presentation by Scott W. Hutto for the SC Bar Probate & Estate

Planning Essentials course with Mr. Hutto’s permission and the author’s gratitude. 2 See IRC § 6012(b)(1)

2

iii. The decedent’s final federal and state 1040 is due the same date that

it would have been due if the decedent had lived the entire year (i.e.

April 15th of the following year for most years, unless the 15th falls on

a weekend. July 15, 2020 for decedents who died in 2019.)

iv. The same rules apply for income tax extensions. The Personal

Representative can apply for an automatic 6-month extension of

time file the decedent’s final 1040. There is no automatic extension

of time to pay the incomes taxes due with the final return.

b. Income Tax for Estates and Trusts.

i. An estate which has $600 or more of gross income during its fiscal

year is required to file a fiduciary income tax return with the IRS and

SC Department of Revenue (i.e. IRS Form 1041 and Form SC1041). 3

The estate income tax returns must be filed by the fifteenth day of the

fourth month following the close of the estate’s fiscal year. If the 15th

is a weekend or holiday, then the return is due the next business day.

ii. A trust which has any taxable income or gross income of $600 or

more is required to file a fiduciary income tax return with the IRS

and SC Department of Revenue (i.e. IRS Form 1041 and SC1041). 4 A

trust’s income tax return must be filed no later than April 15 of the

year following the close of the trust’s calendar year. However, if April

15th is a weekend or holiday, then the return is due the next business

day.

iii. An estate or trust may receive an automatic six-month extension to

file the income tax returns by timely filing IRS Form 7004 and Form

3 IRC § 6012(a)(3) 4 IRC § 6012(a)(4)

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SC8736. An extension of time to file is usually not an extension of

time to pay taxes.

iv. A trust is generally a calendar year taxpayer. An estate can elect any

12-month fiscal year. Selecting a fiscal year for the estate usually

allows for some income tax deferral for the beneficiaries, so this

should be considered in collaboration with the income tax return

preparer. The election is usually made on Form SS-4 while applying

for a tax identification number, though the estate can file the Form

1041 and elect a different year from that initially selected on the Form

SS-4.5

v. Under IRC § 645, a decedent’s estate may elect to report income from

a decedent’s revocable trust on the estate’s 1041. This election

enables the trust income, which is usually reported on a calendar

year, to be reported on a fiscal year. This election also allows the

revocable trust to benefit from other tax benefits which are available

to estates. However, the decision to make a § 645 election should be

discussed with the income tax preparer because it can create some

complications. A § 645 election is made on IRS Form 8855.

c. Income Tax Basis: Step on Up!

i. Generally, a taxpayer’s basis in property is what they pay for it.6 This

is referred to as “Cost Basis.” The taxpayer’s basis is used to calculate

gain or loss on a subsequent sale.

ii. When a taxpayer dies, those who inherit the asset take a new basis in

the asset equal to the fair market value of the asset on the date of

death.7 This is referred to as the “Stepped-up Basis” or the “Step-

up.”

5 See Treas. Reg. § 1.441-1(c)(1) 6 IRC § 1012 7 IRC § 1014

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iii. If the taxpayer gives the property away during life, the donee receives

a transferred basis in the asset (i.e. the taxpayer’s cost basis) and

misses out on the opportunity to obtain a stepped-up basis on death.

iv. While most discussion focuses on basis step up, you could also have

a step down. If the decedent bought near the top of the market and

the market cools, it is possible that the fair market value of the asset

is less than what the decedent paid for it. In that case, those who

inherit the asset would take a new basis that is less than the cost

basis.

EXAMPLE: Dad buys farmland for $100,000 and holds the property for many

years. A new interstate comes through and now the property is worth $1

million. Dad is elderly and knows the end is near. If Dad gives the farmland

to Daughter, then Daughter immediately sells the farmland, Daughter will owe

capital gains tax on the $900,000 of capital gain ($1 million sales price less

transferred/cost basis of $100,000). If instead Dad dies and leaves the

farmland to Daughter and then Daughter immediately sells the farmland,

Daughter will owe no capital gains tax ($1 million sales price less new stepped-

up basis of $1 million (fair market value on date of death)).

d. Closely Held Business Interests

i. If the decedent owned a partnership interest on the date of death (or

more commonly an interest in a limited liability company that is

taxed as a partnership), then the Personal Representative should

consider an election under IRC § 754. The decedent’s basis in the

LLC interest will “step up” (or step down) to the fair market value of

the decedent’s interest on the decedent’s date of death. This is

typically referred to as the “outside basis.” The LLC’s basis in the

assets it owns (the “inside basis”) does not automatically step up on

the death of one of the owners. The 754 election allows the LLC to

“step up” the inside basis of the LLC assets. The election can only be

made by the LLC on the Form 1065 Partnership tax return, no later

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than the due date for the return (including extensions). It is

therefore advisable for the Personal Representative to collaborate

early with their tax advisers and the members or managers of the

LLC.

ii. If the decedent owned corporate stock that is subject to redemption,

the Personal Representative should consider IRC § 303. This section

provides capital gains treatment for the redemption. Under 303, the

redemption will qualify for capital gain treatment to the extent that

the distribution received is not greater than the sum of: (a) estate,

inheritance and other death taxes and interest thereon (as well as

certain generation-skipping transfer taxes) and (b) funeral and

administration expenses. This section only applies if the value of the

stock included in the decedent’s gross estate exceeds 35% of the value

of the decedent’s gross estate reduced by amounts deductible under

IRC §§ 2053 and 2054.

iii. If the decedent owned stock in a Subchapter S Corporation, the

Personal Representative should review each beneficiary receiving the

S Corp stock to ensure the beneficiary is a permitted shareholder and

the favorable tax treatment afforded by Subchapter S will not be

adversely impacted by the transfer of the S Corp stock.

iv. An estate is permitted to be an S Corp shareholder for a reasonable

period of administration.8 Generally, the S Corp stock should be

distributed within 2 years of the decedent’s date of death.

v. Generally, a trust that will receive and continue to own stock in an S

Corp must qualify as either a qualified Subchapter S Trust (“QSST”)

or an electing small business trust (“ESBT”).

8 IRC § 1361(b)(1)(B)

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vi. The QSST election is made by the beneficiary of the trust, not the

trustee or Personal Representative.9 However, the trustee or

Personal Representative needs to coordinate with the beneficiary to

ensure the beneficiary has sufficient time to evaluate the utility of the

QSST election and, if desired, make a timely election. The QSST

election must be made within two months and sixteen days after the

trust has received the S Corp stock.10 For C corporations that elect S

status and the stock is held by a trust, the QSST election must be

made within two months and sixteen days after the S election was

made by the C corporation.11

vii. The ESBT election is made by the Trustee of the trust, not the

Personal Representative.12 The ESBT election must be made within

the same time limits applicable to the QSST election.13

II. ESTATE, GIFT & GENERATION-SKIPPING (“GST”) TAX ISSUES

a. Federal Estate, Gift and Generation Skipping Tax System.

The “Tax Cuts and Jobs Act (“2017 Tax Act”), was signed into law on December

22, 2017. It established, or made permanent, in part:

i. a tax rate of 40 percent for gift, estate and GST taxes;

ii. a $10,000,000 applicable exclusion for estate and gift tax

purposes14;

iii. a $10,000,000 GST exemption amount for GST tax purposes15;

9 IRC § 1361(d)(2) 10 Treas. Reg. § 1.1361-1(j)(6)(iii)(A) 11 Treas. Reg. § 1.1361-1(j)(6)(iii)(B) 12 IRC § 1361 (e)(3) 13 Treas. Reg. § 1.1361-1(m)(2)(iii) 14 IRC § 2010(c)(3)(A) 15 IRC § 2631(c)

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iv. permanent indexing for inflation of the applicable exclusion amount

and GST exemption16;

v. Portability of a deceased spouse’s unused exclusion amount

(“DSUE”) was made permanent; and

vi. there is a “sunset” provision – effective January 1, 2026, the

applicable estate and gift tax exclusion and the GST exemption each

revert back to $5 million (indexed for inflation).

The below chart reflects the changes in the Estate and Gift Tax Exclusion Amount,

the GST Exemption Amount and applicable tax rates since 2009.

Year

Estate Tax Exclusion Amount

Gift Tax

Exclusion Amount

Generation

Skipping Exemption

Highest Estate,

Gift and GST Rates

2009 $3,500,000 $1,000,000 $3,500,000 45%

2010 $5,000,000* $1,000,000 $5,000,000* 35%

2011 $5,000,000 $5,000,000 $5,000,000 35%

2012 $5,120,000 $5,120,000 $5,120,000 35%

2013 $5,250,000 $5,250,000 $5,250,000 40%

2014 $5,340,000 $5,340,000 $5,340,000 40%

2015 $5,430,000 $5,430,000 $5,430,000 40%

2016 $5,450,000 $5,450,000 $5,450,000 40%

2017 $5,490,000 $5,490,000 $5,490,000 40%

2018 $11,180,000 $11,180,000 $11,180,000 40%

2019 $11,400,000 $11,400,000 $11,400,000 40%

2020 $11,580,000 $11,580,000 $11,580,000 40%

16 IRC § 2010(c)(3)(B)

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* Estates of Decedents dying in 2010 could elect out of the above tax system and have modified carry-over basis rules apply.

We are in an election year. As of this writing, the Democratic candidate is leading

in the polls. Other polls indicate the Democrats may take control of the U.S. Senate

and thus gain control of both houses of Congress. Joe Biden has endorsed the

Obama Green Book position, which would reduce the exemption amount to $3.5

million for estate and GST taxes and $1 million for gift taxes and eliminate indexing

for inflation. Therefore, many more families may be affected by estate, gift and

GST taxes as soon as next year.

b. Portability. Prior to the 2010 Tax Act, if an individual died with an estate

having a value less than the value of his or her estate tax exclusion amount,

the unused exclusion amount was lost. The 2010 Tax Act authorized the

transfer of a deceased spouse’s unused exclusion for estate and gift taxes

(“DSUE”) to the decedent’s surviving spouse.17 Portability does not apply to

a decedent’s unused GST exemption. Portability must be elected by the

personal representative of the estate on a timely filed federal estate tax

return, including extensions (See Form 706 and Instructions to Form

706).18 The election is effective as of the decedent’s date of death, and the

surviving spouse may apply the DSUE to any transfer occurring after the

decedent’s date of death. The 2012 Tax Act made “portability” permanent.

EXAMPLE: H dies on July 1, 2020 with a taxable estate of $4,000,000. H

leaves all his assets to his children from his first marriage. H has never used

any of his gift and estate tax exclusion amount, and H is married to W. H’s

available exclusion for 2020 is $11,580,000. H has an excess $7,580,000 of

exclusion amount (“DSUE”) which can be transferred to W by timely filing

Form 706 – Federal Estate Tax Return. Assuming W has never used any of her

17 IRC § 2010(c) 18 IRC § 2010(c)(5)

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gift and estate tax exclusion amount, she would have a total applicable

exclusion amount of $19,160,000 (i.e. her basic exclusion amount of

$11,580,000 + DSUE of $7,580,000) after H’s death in 2020. 19 W would be

able to apply her increased applicable exclusion amount to lifetime gifts or to

distributions occurring at her death.

See Rev Proc 2017-34 for extension of time to file for portability.

c. State Estate or Inheritance Taxes. South Carolina does not have an estate

or inheritance tax. Simply because a client will not owe estate or inheritance

taxes to the State of South Carolina does not mean that they will not owe

some form of these taxes to other states. For example, many clients who

retire and move to South Carolina still own an interest in real property

located in their prior home state. A devise or inheritance of this out-of-state

property could trigger taxes in that jurisdiction. If a client owns property in

another jurisdiction, it is important that the practitioner inform the client

of this possibility and assist the client in determining how to address the

issue. In most cases, assistance is going to come in the form of a CPA or

attorney practicing in that jurisdiction.

As of January 1, 2020, the following states and jurisdictions have

some form of estate or inheritance tax: Connecticut, District of

Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland,

Massachusetts, Minnesota, Nebraska, New Jersey, New York,

Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.

d. Estate Tax Returns.

i. An estate tax return, IRS Form 706, is required to be filed when:

19 IRC § 2010(c)(2)

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1. the decedent’s gross estate, plus adjusted taxable gifts and

specific exemption, is more than the decedent’s basic

exclusion amount; or

2. the personal representative of the estate elects to transfer the

decedent’s DSUE amount to the decedent’s surviving spouse,

regardless of the size of the decedent’s gross estate.

The estate tax return must be filed within 9 months after the

decedent’s date of death. An estate may obtain an automatic six-

month extension of time to file the estate tax return by timely filing

IRS Form 4768.

ii. Pursuant to The Surface Transportation and Veterans Health Care

Choice Improvement Act of 2015, a personal representative is

required to report the final estate tax value of property distributed or

to be distributed from the estate, if a Form 706 estate tax return is

required to be filed. If a Form 706 estate tax return is not required to

be filed, or if the Form 706 estate tax return is being filed solely to

elect portability, this requirement does not apply. IRS Form 8971,

along with a copy of every Schedule A, is used to report values to the

IRS. One Schedule A is provided to each beneficiary receiving

property from the estate.

IRS Form 8971 with attached Schedule A(s) must be filed with the IRS.

Only the Schedule A is provided to the beneficiary listed on that Schedule A.

The due date for filing Form 8971 and providing a copy to the beneficiaries is:

• The date that is 30 days after the date on which Form 706, Form 706-NA, or Form 706-A is required to be filed (including extensions) with the IRS; or • The date that is 30 days after the date Form 706, Form 706-

NA, or Form 706-A is filed with the IRS.

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IRS Form 8971 is a separate filing requirement from the estate’s

Form 706, 706-NA, or 706-A, and should not be attached to the

respective estate tax return. The 8971 and attached Schedule(s) A

must be filed with the IRS, separate from any and all other tax

returns filed by the estate.

FYI -- Certain estate administrative expenses can be deducted on the estate tax return or

the estate’s fiduciary income tax return, but not on both. Therefore, it is important to

coordinate the use of these deductions to obtain the greatest benefit for the estate.

III. GIFT TAX ISSUES

a. Federal Gift Tax Annual Exclusion. Pursuant to The Tax Relief Act of 1997

(“1997 Tax Act”) the annual gift tax exclusion of $10,000 was to be indexed

for inflation. In 2020, the annual exclusion for gifts, after indexing, is

$15,000, as reflected below.

IV. Years Annual Exclusion Amount

Prior to 2002 $10,000

2002 through 2005 $11,000

2006 through 2008 $12,000

2009 through 2012 $13,000

2013 through 2017 $14,000

2018 - $15,000

Under current law, a person may give his or her annual gift tax exclusion

amount to an unlimited number of beneficiaries during a calendar year (i.e.

$15,000 per person, per calendar year).20 Gifts that qualify for the annual gift

tax exclusion or the unlimited annual exclusion for tuition or medical expenses

20 IRC § 2503(b)

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do not reduce a client's applicable exclusion amount.21 Therefore, these types

of gifts often provide the client and the beneficiaries with the most "bang for

the buck." Gifts that exceed a person’s annual gift tax exclusion and gifts which

do not qualify for the annual gift tax exclusion must be reported on IRS Form

709.

For a gift to qualify for the gift tax annual exclusion, the gift must be of a present

interest.22 Therefore, outright gifts of assets, i.e. money, stocks, real estate, will

qualify. However, gifts in trust, or deemed to be in trust, may not qualify unless

the terms of the trust are drafted to take into account the present interest rules.

b. Qualified Educational Expenses. In addition to the gift tax annual

exclusion, a client may make payments directly to an educational

organization for the direct tuition costs of an intended beneficiary.23

However, a gift made to a beneficiary as reimbursement for tuition would

not qualify for the unlimited tuition exclusion. Additionally, the unlimited

exclusion for tuition is not available for amounts paid for books, supplies,

dormitory fees, board, or other similar expenses that do not constitute

direct tuition costs.24

c. Qualified Medical Expenses. Likewise, IRC § 2503(e) allows a client to

make unlimited payments on behalf of another directly to medical providers

without a reduction in his or her applicable exclusion amount. This

exclusion also applies to payments made for medical insurance on behalf of

another.25 However, "[t]he unlimited exclusion from the gift tax does not

apply to amounts paid for medical care that are reimbursed by the donee's

insurance. Thus, if payment for a medical expense is reimbursed by the

donee's insurance company, the donor's payment for that expense, to the

extent of the reimbursed amount, is not eligible for the unlimited exclusion

21 IRC § 2503 22 IRC § 2503(b) 23 IRC § 2503, Treas. Regs. § 25.2503-6(b)(2) 24 Treas. Regs. § 25.2503-6(b)(2) 25 Treas. Regs. § 25.2503-6(b)(3)

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from the gift tax and the gift is treated as having been made on the date the

reimbursement is received by the donee."26

d. Gift Valuation issues. If a client has made a completed gift, the amount of

the gift is the fair market value of the gift at the time the donor made the

transfer. 27 "Fair market value" is defined as the price at which the property

would change hands between a willing buyer and a willing seller, neither of

whom is under any compulsion to buy or to sell, and both having reasonable

knowledge of relevant facts.28

e. Special Valuation Rule for Gifts with Retained Interests. There are special

valuation rules found in IRC §§ 2701 through 2704. While a thorough

discussion of these sections is outside the scope of these materials, the

implications of IRC § 2702 need to be addressed more thoroughly herein

because of its association with a very basic planning technique. IRC § 2702

applies to transfers in trust, or property treated as held in trust29, for the

benefit of certain family members, when the transferor retains an interest

in the property transferred. If IRC § 2702 applies, any retained interest is

valued at zero unless the interest is a "qualified interest." Therefore, if a

client makes a gift of a remainder interest in her residence to her children,

retaining a life estate for herself, the amount of the gift will be the full fair

market value of the residence. The effect of IRC § 2702 is to increase the

gift tax cost associated with this type of gift. To make matters worse, the

retained life estate would be subject to IRC § 2036, which would cause the

entire value of the residence to be pulled back into the client's estate at

death.

f. Gift Tax Returns.

26 Treas. Regs. § 25-2503-6(b)(3) 27 Treas. Regs. § 25.2512-1 28 Treas. Regs. § 25.2512-1 29 Treas. Regs. § 25.2702-4

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i. A gift tax return, IRS Form 709, is required to be filed if:

1. an individual made gifts to someone totaling more than the

individual’s annual gift tax exclusion during the calendar year,

or

2. if the individual made gifts which do not qualify for the annual

gift tax exclusion.

Generally, the gift tax return is due by April 15th of the year after the

gift was made. There are two methods of obtaining an extension of

time to file:

1. an extension of time to file a calendar year federal income tax

return automatically extends the time to file the gift tax

return; or

2. timely filing IRS Form 8892.

g. The Personal Representative is required to file any gift tax returns of the

decedent donor that are not filed as of the decedent’s date of death.30

h. State Gift Taxes. South Carolina does not have a gift tax. Simply because a

client will not owe gift taxes to the State of South Carolina does not mean

they will not owe some form of these taxes to another state. As of January

1, 2020, Connecticut is the only state that continues to collect a gift tax.

V. GENERATION SKIPPING TRANSFER TAX ISSUES

a. The GST tax regime is extremely complex and therefore beyond the scope

of this outline. However it is important for the general practitioner to be

able to spot the issue so that an attorney or CPA with GST experience can

be associated to handle the matter properly.

b. Generally, the GST tax is a flat 40% tax imposed on outright gifts and

transfers in trust to or for the benefit of related persons more than one

generation younger than the donor or unrelated persons more than 37½

years younger than the donor.

30 Treas. Regs. § 25.6019-1(g)

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c. The most common examples of generation skipping transfers are gifts to

grandchildren and gifts to trusts that benefit children for life, then pass to

grandchildren without being taxed at the child’s generational level.

d. The GST tax can be extremely punitive and proper allocation of the GST

exemption may be critical to minimize the GST tax.

9. Typical Tax Forms to Know. The following forms are available for review in

pdf format on the IRS website – www.irs.gov or the SC Department of Revenue website –

www.sctax.org. If you are not preparing and filing these forms, it is very helpful to

understand the forms, the information required for the forms, and when the forms are

due to be filed. If you are not filing these forms, you should coordinate with the tax

preparer who will be filing them.

a. IRS Form 56 – Notice Concerning Fiduciary Relationship

b. IRS Form SS-4 – Application for Employer Identification Number

c. IRS Form 1040 – U.S. Individual Income Tax Return

d. IRS Form 1041 – U.S. Income Tax Return for Estates and Trusts

e. IRS Form 7004 and Form SC8736 – Application for Extension of Time to

File U.S. Income Tax Return for Estates and Trusts and Request for

Extension of Time to File SC Return for Fiduciary and Partnership

f. IRS Form 8855 – Election to Treat a Qualified Revocable Trust as a Part of

an Estate

g. IRS Form 709 – United States Gift (and Generation Skipping Transfer) Tax

Return

h. IRS Form 8892 – Application for Automatic Extension of Time to File Form

709 and/or Payment of Gift/Generation Skipping Transfer Tax

i. IRS Form 706 – United States Estate (and Generation Skipping Transfer)

Tax Return

j. IRS Form 4768 – Application for Extension of Time to File a Return and/or

Pay U.S. Estate (and Generation Skipping Transfer) Taxes

k. IRS Form 8971 – Information Regarding Beneficiaries Acquiring Property

from a Decedent

http://www.irs.gov/

http://www.sctax.org/

7/20/2020

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William G. Newsome III, J.D., LL.M. (Tax)Certified Specialist in Estate Planning & Probate Law

NEWSOME LAWTAX | ESTATE | TRUST

1501 Main Street, Suite 601 | Columbia, SC 29201803-218-9644 | Fax 803-205-0814

[email protected]


Income Tax Issues

• Decedent’s Final 1040 (& possibly others?)

• Joint Income Tax Return

• 6 month Extension of Time to file (not to pay)

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Income Tax for Estates and Trusts

• Estate – $600 or more of gross income during fiscal year, fileIRS 1041 and SC1041• Trust – any taxable income or gross income of $600 or moreduring tax year, file IRS 1041 and SC1041• Estate or trust may receive a 6 month extension• Fiscal year vs. Calendar year• IRC § 645 Election


Income Tax Basis

• Section 1012 Cost Basis

• Section 1014 Basis Step Up (or Step Down)

• Lifetime gift = Transferred Basis

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•Example: Dad buys farmland for $100,000 that is now worth $1million. Dad is elderly and knows the end is near. If Dad gives thefarmland to Daughter, then Daughter immediately sells the farmland,Daughter will owe capital gains tax on the $900,000 of capital gain ($1million sales price less transferred/cost basis of $100,000). If insteadDad dies and leaves the farmland to Daughter and then Daughterimmediately sells the farmland, Daughter will owe no capital gains tax($1 million sales price less new stepped‐up basis of $1 million (FMV ondate of death)).

Post-Mortem Tax IssuesClosely Held Business Interests

• 754 Election for Partnerships and LLCs taxed as Partnerships

• 303 Redemption for Corporations

• S Corp Issues

• QSST & ESBT

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Post-Mortem Tax IssuesEstate,Gift and Generation‐Skipping Tax System

1. $10 million exclusion for estate and gift taxes and GSTexemption amount‐ indexed for inflation.

2. 40% flat rate.

3. Sunset drops $10 million to $5 million in 2026, unless . . .

4. New administration and new Congress change the law in2021???

Post-Mortem Tax IssuesPortability1. Deceased Spouse’s Unused Exemption Amount (DSUE) maypass to the surviving spouse.2. Only applies to Estate and Gift Exclusion Amounts.3. Does not apply to GST Exemption.4. Election is made on a timely filed 706, including extensions.5. Surviving spouse may apply DSUE to transfers occurring afterdecedent’s date of death.6. Last deceased spouse rule!!!7. See Rev. Proc. 2017‐34 for Extension of Time to file forPortability.

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Post-Mortem Tax IssuesEXAMPLE: H dies on July 1, 2020 with a taxable estate of $4,000,000. H leaves all his assets to his children from his first marriage. H has never used any of his gift and estate tax exclusion amount, and H is married to W. H’s available exclusion for 2020 is $11,580,000. H has an excess $7,580,000 of exclusion amount (“DSUE”) which can be transferred to W by timely filing Form 706 – Federal Estate Tax Return. Assuming W has never used any of her gift and estate tax exclusion amount, she would have a total applicable exclusion amount of $19,160,000 (i.e. her basic exclusion amount of $11,580,000 + DSUE of $7,580,000) after H’s death in 2020. W would be able to apply her increased applicable exclusion amount to lifetime gifts or to distributions occurring at her death.

Post-Mortem Tax IssuesState Gift, Estate and/or Inheritance Taxes

• SC does not have a gift, estate or inheritance tax.

• Other states do . . .

• Connecticut, District of Columbia, Hawaii, Illinois, Iowa,Kentucky, Maine, Maryland, Massachusetts, Minnesota,Nebraska, New Jersey, New York, Oregon, Pennsylvania, RhodeIsland, Vermont, and Washington

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Post-Mortem Tax IssuesEstate and Gift Tax ReturnsEstate Tax Return: IRS Form 706

1. File if decedent’s gross estate, plus adjusted taxable gifts, ismore than the basic exclusion amount.

2. File if Personal Representative elects to transfer decedent’sDSUE to surviving spouse.

3. 706 due 9 months after Date of Death.

4. 6 month extension available.

Post-Mortem Tax IssuesEstate and Gift Tax ReturnsEstate Tax Value: IRS Form 8971PR is required to report the final estate tax value of property distributedor to be distributed from the estate, if an estate tax return is required tobe filed.IRS Form 8971, along with a copy of every Schedule A, is used to reportvalues to the IRS. One Schedule A is provided to each beneficiary receivingproperty from the estate.The due date for filing Form 8971 and providing a copy to thebeneficiaries is 30 days after date Form 706 is required to be filed(including extensions) or 30 days after date Form 706 is filed.Form 8971 is a separate filing requirement from the estate’s Form 706and should not be attached to the estate tax return.

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Post-Mortem Tax IssuesEstate and Gift Tax Returns

Gift Tax Return: IRS Form 709

1. File if gifts exceed annual exclusion.

2. File if gifts that do not qualify for annual exclusion.

3. 709 due by April 15 of the year after gift.

4. Extensions available for filing.

William G. Newsome III

[email protected]

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Special Probate and Trust Situations

William G. Newsome, III J. Aaron Nelson, Jr.

1

Presented by

J. Aaron Nelson, Jr. Esq.

Of Counsel, Merline & Meacham, P.A.

Owner, The Nelson Law Firm of Bluffton, LLC

William G. Newsome III, Esq.

Newsome Law, P.A.

Scenario 1

Tom and Pam have been married for 15 years. Tom has 2 kids, Tom, Jr. and Elizabeth, from a prior marriage. Tom and Pam’s residence is solely in Tom’s name. Other than their residence (which is a nice residence), Tom and Pam have very little assets (a vehicle, some jewelry, and other miscellaneous personal property).

Tom and Pam had wills prepared in 2010. Once they were executed, Pam took her documents and put them in her safe and Tom took his documents and placed them in his safe.

Tom died about two months ago and Pam has been unable to find Tom’s original will. Pam makes an appointment because Tom’s children are asking her to leave the house.

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Probating Copies of Documents

Requires formal action (Summons and Petition).

A presumption of revocation by physical destruction comes about if the testator had the original will in their possession and original cannot be located.

Relevant facts to overcome presumption (Pallister and Golini):

Evidence of other wills with consistent terms

Reasons for a revocation

Whether Testator would have likely revoked by other means (such as a new will prepared by an attorney).

Executor de Son Tort (§62‐3‐619)

Person has property of decedent through fraud or without paying equivalent value

Court can:

Require accounting

Determine if property converted, wasted or damaged through improper action

Assess damage not to exceed value of property

Award attorney fees and costs

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Special Administrator (§62‐3‐614 to 618)

Informal (Application)

To protect estate if no PR

To allow creditor to file a claim

To take appropriate action

Cannot distribute assets except to PR

Formal (Petition)

To preserve estate

To properly administer estate when PR cannot or should not act

Can be done without notice if emergency

Has power of PR unless limited

Form 332ES

Relation back (§62‐3‐701)

The powers of a Personal Representative “relate back” to the death of the decedent for beneficial acts.

Prior to appointment, a person named as Personal Representative may protect property of the decedent’s estate and carry out written instruction of the decedent related to his body, funeral, and burial arrangements.

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Demand for Bond (§62‐3‐605)

Demand for bond by interested person or creditor with claim ˃ $5,000

Calculated based on value of personal property plus expected income within one year.

Exempt Property (§62‐2‐401)

$25,000 in excess of security interests in household furniture, automobiles, furnishings, appliances and personal effects, or other assets if listed assets are insufficient

Claimed by spouse or, if none, by minor or dependent child

Charged against share already passing to spouse or child

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Tangible Personal Property

Presumption. S.C. Code 62‐2‐805(A).

Tangible personal property in the joint possession or control of married individuals is presumed to pass with rights of survivorship.

Certain Exceptions: Titled property.

Pre‐marital property.

Gifts.

Trade or business property.

Specifically devised assets.

Sale of Real Estate (§62‐3‐1301)

Requires Summons & Petition (Form 430 ES)

Serve interested parties (includes unpaid creditors)

File Lis Pendens

Reasons to seek Court Approval

No Will See § 62‐3‐711

Conflict of Interest

Concern over sales price or terms of contract

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Sale of Personal Property (§62‐3‐711)

PR can sell personal property without authority in will or court order if

Under $10,000, or

Securities regularly traded on national exchange

Commodities for which market values are readily ascertainable

Application required (Form 329ES)

Notice as court requires

Partition (§62‐3‐911)

Available for real or personal property

Petition by PR or heirs or devisees entitled to property

Court must partition in kind if can be done fairly and equitably

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Scenario 2

Robert and Maggie have been married all of their lives. Robert has owned and operated a successful business in town. They have three kids, Robert, Jr., Rebecca, and Jimmy. Robert, Jr., is the “anointed successor” to run the business after Robert’s death.

Robert’s revocable trust (Maggie is the successor Trustee) provides that any interest in the business is to be distributed to Robert, Jr., a beach residence is to be distributed to Rebecca, and a mountain residence is to be distributed to Jimmy, and the remaining assets are to be distributed to a trust for the benefit of Maggie.

Jimmy has had several unsuccessful attempts at starting a business and has many creditors. The family has had no contact with Rebecca since the late ‘90s and fear the worst.

Missing Beneficiaries (§62‐3‐914)

Court may issue notice to all interested persons to appear

Notice published once week for 3 weeks in county and in other publication most likely to give notice

If person does not appear, then distributed as though person is deceased

$5,000 or less can be paid to State Treasurer

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Disclaimers (§62‐2‐801)

Any qualified disclaimer under Section 2518 of the Internal Revenue Code.

State requirements:

In writing.

Declare the writing as a disclaimer.

Describe the interest or power disclaimed.

Be delivered to the transferor within a “reasonable

time.”

Anti‐Lapse (§62‐2‐603)

Unless a contrary intent is indicated, a bequest to anyone under the great‐grandparent “umbrella” is covered by the anti‐lapse statute.

The bequest will go to the beneficiary’s issue, taking by representation.

Words of survivorship are a sufficient indication of contrary intent in the will context, but not in the trust context.

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Operating a Business

“Unincorporated business” may only be operated for up to four months without authorization in Will. (§62‐3‐715(22))

Additional liability vs. preservation of value

Consider conflict of interest for Personal Representative who is employed by business.

Selling Specifically Devised Assets (§62‐3‐906)

A power to sell is sufficient indication that a specifically devised assets may be sold.

If no power to sell is granted (very rare), the devisee is entitled to the item devised.

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Private Agreements (§62‐3‐912)

Agreement among competent successors. Note the use of the word “successors” means that you cannot add a beneficiary.

Trustee is the successor for a testamentary trust

Written contract executed by all affected

Since agreement affects beneficial interests, should be filed with probate court, particularly if real property is affected

Scenario 3

Jimmy did not have very good health insurance and during the last years of Jimmy’s life, he accumulated a substantial amount of debt from medical bills and other sources.

Jimmy’s estate is worth about $150,000 ($125,000 residence, subject to a $50,000 mortgage, and $50,000 in other assets), but debts are expected to be about $100,000).

Jimmy’s will provides that his residence is to be distributed to his children, and the remainder is to be distributed to his wife.

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Exempt Property (§62‐2‐401)

$25,000 in excess of security interests in household furniture, automobiles, furnishings, appliances and personal effects, or other assets if listed assets are insufficient

Claimed by spouse or, if none, by minor or dependent child

Charged against share already passing to spouse or child

Order of Abatement (§62‐3‐902)

Probate Property

Intestate property

Residuary devises

General devises

Specific devises

Non‐Probate Assets

Joint Accounts (§ 62‐6‐205) Creditor makes written demand on PR; PR must bring

proceeding within 1 year from death

Sums recovered become estate assets

Financial institution may make payment unless served with probate court order

Revocable Trusts (§ 62‐7‐505)

Only funds in the revocable trust at the date of the Settlor’s death

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Classification of Claims(§62‐3‐805)

First: Costs of administration, including funeral expenses

Second: Federal debts

Third: Medical expenses of last illness

Fourth: State law debts, in order of their preference

Fifth: Other debts

Persons lending money to the estate for the payment of a “specific claim” shall stand in the shoes of the claimant.

Exoneration (§62‐3‐814)

“If any assets of the estate are encumbered by mortgage, pledge, lien, or other security interest, the personal representative may pay the encumbrance or any part thereof, renew, or extend any obligation secured by the encumbrance or convey or transfer the assets to the creditor in satisfaction of his lien, in whole or in part, whether or not the holder of the encumbrance has presented a claim, if it appears to be for the best interest of the estate. Payment of an encumbrance does not increase the share of the distributee entitled to the encumbered assets unless the distributee is entitled to exoneration.”

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Divorce (§62‐2‐507 and §62‐7‐607)

Revokes spouse as beneficiary, holder of Power of Appointment, and fiduciary appointments

Severs joint tenancies

Revokes life insurance, annuity, POD/TOD and retirement beneficiary

**But see Hillman v. Maretta. 133 S.Ct. 1943 (June 3, 2013) as to federal pre‐emption for qualified plans and federal benefits

Elective Share (§62‐2‐201, et seq.)

1/3 of net probate estate

Can be waived before or after marriage if “fair and reasonable” written disclosure of a parties “property and financial obligations.”

File Summons & Petition within later of

8 months from date of death

6 months from probate of Will, or

30 days after service upon spouse of petition to set aside or modify probate of will

Form 404 ES

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Satisfaction of Elective Share (§62‐2‐207)

Life insurance, IRA, qualified plan, annuity benefits payable to spouse count toward satisfaction. Note that these may not be included in “net probate estate.”

Property in testamentary and living trusts counts

Property held in a trust qualifying under I.R.C. 2056 is valued at full value

Value of elective share determined using date of death values

Satisfaction uses date of distribution values

Surviving spouse can require income only trust to be converted to unitrust

Omitted Spouse (§62‐2‐301)

Married Decedent after Will executed

Receives intestate share (not elective share) unless Will shows that:

Omission was intentional

Nonprobate transfers were intended to provide for spouse

Must be claimed within later of:



30 days after service of petition to set aside or modify probate of will

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Omitted (Pretermitted) Child (§62‐2‐302)

Child was born or adopted after Will executed or Child was believed by Testator to be dead

Receives intestate share unless:

Will shows that omission was intentional

Testator devised substantially all of estate to spouse, or

Non‐Probate transfers were intended to provide for child

Must be claimed within the later of



30 days after service upon spouse of petition to set aside or modify probate of will

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