by Cody Jones and Ashley Ray for the Oklahoma Bar Journal February 2019
The term “estate planning” implies that a plan for the administration of an estate exists, which, of course, most estate planning attorneys would prefer. However, those same estate planning attorneys likely spend much of their time administering estates of decedents who did not have a plan in place at their death or who had a plan in place that was poorly prepared or never updated. This article addresses some common issues attorneys might encounter in unplanned or poorly planned estates.
IMMEDIATE NEEDS UPON DECEDENT’S DEATH
Disposition of Remains
When a loved one dies, addressing the immediate needs of the individual’s estate can be chaotic for the family. One of the first decisions the family must make is determining the manner of the disposition of the decedent’s remains. If family members all get along, this may not be a contentious decision. When emotions run high and family members do not see Eye to Eye, this decision may become volatile. If the decedent had exercised thoughtful foresight while alive, he or she could have executed an assignment of right regarding disposition of remains pursuant to 21 Okla. Stat. §1151 (2011), which would have delegated to someone the right to control the decisions regarding the decedent’s remains. If no such assignment exists, the individual with priority to control the decisions is determined pursuant to 21 Okla. Stat. §1158 (2011), which is similar to the statute determining those individuals who will have priority to serve as administrator of an intestate estate. The Oklahoma Court of Civil Appeals has previously found it is “highly impractical” to obligate a funeral home to determine all persons who are in the same degree of kinship to the decedent and obtain consent from all of them. Thus, in poorly planned estates, the decisions regarding disposition may be decided on a first-come-first serve basis. In order to avoid such disputes among children, for instance, an assignment of right regarding disposition of remains is advisable.
The welfare of pets is also an immediate concern upon someone’s death. If it is not desired for pets to be surrendered to the local shelter, an individual should have a discussion with friends and family to identify who would be willing to care for the pets – perhaps even including provisions within the individual’s estate planning documents to provide accordingly. A pet owner might consider creating a “pet trust” for the benefit of his or her domestic animals. Without such planning in place, what happens when the care for pets has not been considered in advance? By statute, dogs are considered the personal property of the owner, and by analogy other domesticated pets may also be considered personal property. Thus, the provisions for personal property under a will and the provisions for exempt property allowed the family likely control pursuant to 58 Okla. Stat. §12 (2011). The greater concern, however, is the immediate welfare of the animals. If law enforcement has reason to believe an animal has been abandoned or neglected by the owner and no one is coming forward to care for the animal, the officer may obtain a warrant and the animal will be impounded. The owner (or the deceased owner’s representative) will receive notice of a hearing to determine if the animal was in fact abandoned, and if the court determines a violation has occurred, the animal will be surrendered to a shelter or euthanized, depending on the circumstances, and costs will be allocated to the owner or the owner’s estate. Thus, it is in the best interests of the estate for the personal representative or immediate family members to care for the pets of the decedent or locate someone who can until further disposition can be made.
Social Media Accounts
Another issue that may be an immediate concern after death is an issue that has arisen with the growth of social media. What should the family do with the decedent’s social media accounts, especially when the unfortunate news about the decedent’s death is spreading? Being aware of the options for management of a deceased person’s account for each networking website can prevent additional, unnecessary anxiety for the family. Although thoughts, prayers and fond memories may be publicly expressed and appreciated on social media sites, awkward or inappropriate messages may also be posted to the decedent’s page, in which case they may linger indefinitely if no one is appointed personal representative. Upon appointment as executor or administrator of the estate, the personal representative is given the power by statute to control the decedent’s social networking, blogging and emailing service websites. However, each website has its own policy and procedures. For example, Facebook allows users to appoint a “legacy contact” to manage the decedent’s page, which can be memorialized or deleted following the decedent’s death. Most other social networking websites require an immediate family member or personal representative to contact the company to either memorialize, deactivate or delete the user’s account. Memorializing an account, which prevents others from making changes to the account, is an Immediate Action on most networking websites. Deleting the account, however, may take several months. Thus, it is in an individual’s best interests to explore relevant social media website policies in advance in order to control the account management soon after death.
Lastly, another immediate concern upon death is locating the decedent’s original estate planning documents, if any, and safely securing them for as long as necessary because documents can and do go missing if not properly secured. If an individual has a planned estate, yet the plan cannot easily be located, then even the best laid plan can go awry quickly. The original documents may identify the nominated personal representative, which will give the personal representative assumed authority to make decisions regarding the safety of the decedent’s pets, the security of the decedent’s home and the security of the decedent’s accounts. The original will should be delivered to the named executor in the will or otherwise filed with the district court, if possible, pursuant to 58 Okla. Stat. §21 (2011). While determining if a probate of the will is necessary, the named executor should secure the document in order to avoid proceedings to prove a lost will under 58 Okla. Stat. §81 (2011), if a probate is ultimately deemed warranted. Practitioners should make a habit of noting in their clients’ files where their client intends to store their original documents, hopefully ensuring someone other than the client will have access to them when needed. Although the practice cannot prevent the loss of all documents, this file note may be invaluable when the family contacts the decedent’s attorney upon the decedent’s death.
ISSUES DISCOVERED AFTER IMMEDIATE NEEDS ARE ADDRESSED
The Effect of Divorce on Beneficiary Designations
After the obvious concerns are addressed in the first few days after a death, issues in the decedent’s estate tend to surface. Discovering the decedent failed to update beneficiary designations before death is one of the most common issues estate attorneys must face. Although property division is a significant issue dealt with during a divorce, updating the beneficiary designations on such property postdivorce can often be overlooked. By statute, all provisions in a will in favor of a decedent’s ex-spouse are revoked. Likewise, all provisions in a trust created by a decedent in favor of the decedent’s ex-spouse, which are to take effect upon the death of the decedent, are also revoked. What happens to assets naming the ex-spouse as primary beneficiary if a property owner fails to update the beneficiary designations on assets passing by contract outside of the decedent’s probate or trust estate? For instance, are the provisions of a payable-on-death designation on a financial account enforceable upon the decedent’s death? Under 15 Okla. Stat. §178 (2011), “all provisions in the contract in favor of the decedent’s former spouse are thereby revoked” upon divorce, subject to a few exceptions. This statute applies to life insurance, annuities, compensation agreements, retirement arrangements and other contracts executed on or after Nov. 1, 1987, and to depository agreements and security registrations executed on or after Sept. 1, 1994. This begs the question, is a transfer-on-death deed naming an ex-spouse still enforceable at death if it was never revoked by the grantor-owner? Although similar to a will, a transfer-on-death deed is expressly not a testamentary disposition, so 84 Okla. Stat. §114 (2011) is seemingly inapplicable to a transfer-on-death deed. The transfer-on-death deed is also not a bargained for contract in which consideration is exchanged, so 15 Okla. Stat. §178 (2011) is also seemingly inapplicable. Thus, arguably, a transfer-on-death deed designation may survive a divorce, which is something family law practitioners should be mindful of in addressing a property division.
One other exception to the revocation of a beneficiary designation upon divorce involves the ex-spouse’s interest in ERISA benefit plans. In Egelhoff v. Egelhoff ex rel. Breiner, the United States Supreme Court held that a Washington statute revoking the beneficiary designation of an ex-spouse was pre-empted as it applied to ERISA benefit plans. Given this decision, Oklahoma’s version of the Washington statute, 15 Okla. Stat. §178 (2011), would be ineffective in terminating an ex-spouse’s interest in a decedent’s ERISA plan. Therefore, a divorced decedent must have updated the ERISA plan’s beneficiary designation to someone other than the ex-spouse, or the ex-spouse must subsequently waive such interest, otherwise the plan will be administered with benefits being paid to the named ex-spouse, which may or may not be part of the divorce settlement.
The Effect of the Beneficiary Predeceasing the Decedent
Perhaps more commonly than after divorce, owners fail to update beneficiary designations after a named beneficiary dies. This may be due to the owner’s neglect or due to the owner’s incapacity and inability to change beneficiary designations. Upon the owner’s death in such situations, the language of the document will typically control if the asset passes 1) to the estate of the deceased beneficiary, 2) to a contingent beneficiary or 3) to the decedent’s estate. If a contingent beneficiary is not named, most assets will default to the estate of the decedent.
However, if a contingent beneficiary is not named on a bank account, the share of the deceased primary beneficiary shall be paid to the deceased beneficiary’s estate rather than the decedent’s estate. This runs contrary to most expectations that a gift to a deceased beneficiary will lapse. In the case of real property under the Nontestamentary Transfer of Property Act, a gift of real property pursuant to a transfer-on-death deed will lapse if the grantee beneficiary does not survive the owner. If no contingent beneficiary is named, the real property will be trapped in the name of the deceased owner and default to the deceased owner’s estate.
Failure to update beneficiary designations on individual retirement accounts can trigger unwanted estate administration as well as unwanted tax consequences. When there is no living beneficiary designated for an IRA, upon the accountholder’s death, the IRA passes according to the terms of the associated financial institution’s plan. If an account holder fails to name a designated beneficiary, then oftentimes the IRA benefits are distributed based on who the financial institution states is the default beneficiary. The institution may have a few layers of default beneficiary designations for the account – such as passing to the decedent’s spouse, then children and then to the estate. These default designations may result in negative tax consequences that could have been avoided if the account holder had updated the beneficiary designations.
When an IRA is made payable to a decedent’s estate there is a unique scheme for distributions because the IRS does not consider an estate to be an individual. Logically, a nonindividual, such as an estate, does not have a life expectancy over which to stretch out required minimum distributions. Whether there ends up being a More or Less favorable outcome for the eventual takers of the estate depends on if the original account holder survived to the age of taking mandatory distributions. If the account holder did not reach such age, then the eventual takers of the IRA must distribute the balance of the account by the end of five years. If the original account holder did survive past the age of taking mandatory distributions, then the eventual takers may stretch the IRA distributions over a period calculated by “[u]sing the life expectancy listed next to the owner’s age as of his or her birthday in the year of death” and “[r]educ[ing] the life expectancy by one for each year after the year of death.” While the second option does not allow the individuals to stretch the IRA over their own lifetimes, it will allow some benefit from delaying distribution, and the resulting tax, of the entire amount.
To qualify for inherited IRA treatment, 26 U.S.C. §408(3)(C)(ii) (2018) requires that the “individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another” and that they were not the “surviving spouse.” Although not binding authority, in a private letter ruling (PLR) the IRS discussed the issue of whether the ultimate beneficiaries of an estate can qualify for inherited IRA treatment. In that PLR, an estate was the designated IRA beneficiary, received the IRA and conveyed it to a trust. The trust was to terminate and distribute all assets to the deceased’s four children. The IRS allowed the four children to each establish an inherited IRA for each respective share. Thus, failed designations may not have negative tax consequences, but this is by no means guaranteed.
The Backfiring of Joint Tenancy Ownership
Oftentimes, the death of a named beneficiary triggers issues when individuals exercised self-help to avoid probate. One of the more common options for avoiding probate is titling assets in joint tenancy with rights of survivorship. This can be dangerous planning for individuals, particularly the original owner, because it exposes the asset to the creditors of all the joint tenants. Additionally, if the joint tenants do not die in the expected order, the use of joint tenancy may backfire. For example, if the oldest
owner, typically the one who was trying to avoid probate, is the sole surviving owner, the owner may no longer be able to make alternative arrangements due to incapacity. Joint tenancy may also create confusion if utilized only for convenience prior to the decedent’s death, in which case the use of joint tenancy on a bank account may result in a constructive trust argument. Self-help through joint ownership might also create inequitable results. Many times, joint tenancy is utilized by the decedent subject to the mutual understanding between the owners that the survivor will manage and distribute the assets according to the decedent’s wishes. However, the surviving joint owner may decide not to fulfill the decedent’s wishes, in which case the surviving owner may reap a windfall. Additionally, the surviving joint owner may lack capacity or have new creditor issues, in which case even if the surviving joint owner was well-intentioned, the decedent’s wishes for the property will remain unfulfilled.
Tasking the surviving joint owner to fulfill the decedent’s wishes may also trigger gift tax consequences for the surviving owner’s estate. For a surviving owner to fulfill a decedent’s wishes for others to benefit from the asset now wholly owned by the survivor, the survivor must give the assets to other individuals. In doing this, the survivor must keep in mind that these transactions may have gift tax consequences. Each individual has a lifetime gift tax exclusion representing the total amount they can give away over their entire lifetime without gift tax consequences. With the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, the basic exclusion amount increased significantly. After being indexed for inflation, the thresholds for 2019 are now $11,400,000 for an individual and $22,800,000 for a couple. Additionally, each year an individual may gift a certain amount without cutting into their lifetime basic exclusion amount. The individual may give up to $15,000 annually to any person as of 2019 without utilizing his or her lifetime exclusion amount. In order to avoid any gift tax consequences while honoring the decedent’s wishes, a surviving joint owner must avoid giving more than $15,000, or potentially $30,000 for a donor couple, in a taxable year. If the surviving owner decides to gift more than this in the taxable year, the sum over the annual gift tax exclusion will reduce the survivor’s lifetime gift tax exclusion amount, creating potential problems if the surviving owner already has a substantial estate.
As is evident, the road to avoid conflicts and cost after death is often paved with good intentions. Practitioners clearly cannot follow their clients throughout their lifetimes making sure fiduciary powers are adequately assigned, assets are appropriately titled and beneficiary designations are frequently reviewed. Perhaps it would be useful to give an estate information handbook to clients to review and complete independently on an annual basis, providing them a convenient resource for all their beneficiary designations, funeral wishes, fiduciary appointments, online information and any other relevant asset information. Such handbook would not prevent the consequences of an unplanned estate, but it might prevent what was once a well-planned estate from turning into a poorly planned estate due to circumstances beyond the estate attorney’s control.
1. See 58 O.S. §122 (2011).
2. Brady v. Criswell Funeral Home, Inc., 1996 OK CIV APP 1, ¶9, 916 P.2d 269, 271.
3. 60 O.S. §199 (2011) (stating trusts for the “care of domestic or pet animals is valid” and such instrument shall be liberally construed).
4. See 21 O.S. §1717 (2011).
5. 4 O.S. §512(A) (2011).
6. Id. §512(C).
7. 58 O.S. §269 (2011) (stating the personal representative has power “to take control of, conduct, continue, or terminate any accounts of a deceased person”).
8. See “Managing a Deceased Person’s Account,” Facebook www.facebook.com/help/275013292838654 (last visited Oct. 3, 2018) (select “Facebook Help Center”; then follow “Polices and Reporting”; then follow “Managing a Deceased Person’s Account”).
9. Practitioners and clients should explore policies for addressing decedent’s accounts on Twitter, Instagram, LinkedIn, Facebook and Pinterest and discuss such matters with their clients.
10. 84 O.S. §114 (2011).
11. 60 O.S. §175 (2011). Note §175(B)(6) permits the trustor to name the ex-spouse as a beneficiary in an amendment executed after the divorce or annulment.
12. 58 O.S. §1258 (2008), stating a transfer-on-death deed “shall not be considered a testamentary disposition.”
13. See Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001).
14. Id. at 147-51 (“The [state] statute binds ERISA plan administrators to a particular choice of rules for determining beneficiary status . . . [I]t runs counter to ERISA’s commands that a plan shall ‘specify the basis on which payments are made to and from the plan,’ §1102(b)(4), and that the fiduciary shall administer the plan ‘in accordance with the documents and instruments governing the plan,’ §1104(a)(1)(D), making payments to a ‘beneficiary’ who is ‘designated by a participants, or by the terms of [the] plan.’ §1002(8).”).
15. 6 O.S. §2025(A)(2) (2011).
16. 84 O.S. §142 (2011).
17. 58 O.S. §1255(B) (2011).
18. See, e.g., Morgan Stanley Funds Designation of Beneficiary Form, Morgan Stanley Investment Group (March 2017)www.morganstanley.com/im/publication/forms/msf/designationofbeneficiaryform_msf.pdf.
19. I.R.S., Dep’t of the Treasury, Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) 9, 10 (Feb. 6, 2018).
20. See I.R.S., Dep’t of the Treasury, Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) 10 (Feb. 6, 2018).
23. See I.R.S. Priv. Ltr. Rul. 2012-08-039 (Nov. 17, 2011).
24. See Isenhower v. Duncan, 1981 OK CIV APP 31, 635 P.2d 33 (“The proper basis for impressing a constructive trust is to prevent unjust enrichment.”). See also 60 O.S. §74 (2011) (discussing joint tenancy); 60 O.S. §137 (2011) (explaining when a trust is presumed).
25. See Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, §11061, 131 Stat. 2054, 2091 (2017).
26. See 26 U.S.C. §2503 (2017).
27. See 26 U.S.C. §2513 (2017).