DRAFTING FOR THE SETTLEMENT OF ESTATES AND TRUSTS R. Glenn Davis

Transcription

DRAFTING FOR THE SETTLEMENT
OF ESTATES AND TRUSTS
R. Glenn Davis
Scott, Hulse, Marshall, Feuille,
Finger & Thurmond, P.C.
201 East Main, 11th Floor
El Paso, Texas 79901
915.546.8253 (Office)
915.546.8333 (Facsimile)
201 North Church Street, Ste. 201
Las Cruces, New Mexico 88001
575.522.0765
[email protected]
STATE BAR OF TEXAS
19 ANNUAL ADVANCED DRAFTING: ESTATE
PLANNING AND PROBATE COURSE
OCTOBER 30 – OCTOBER 31, 2008
AUSTIN, TEXAS
th
CHAPTER 16
R. Glenn Davis
Shareholder
1100 Chase Tower
201 East Main Drive
El Paso, Texas 79901
Telephone (915) 546-8253
Facsimile (915) 546-8333
[email protected]
201 NORTH CHURCH STREET, SUITE 201
LAS CRUCES, NEW MEXICO 88001
TELEPHONE (575) 522-0765
FACSIMILE (575) 522-0006
Legal Experience:
Scott, Hulse, Marshall, Feuille, Finger & Thurmond, P.C., El Paso, Texas. Shareholder – January 2001 to present; Associate –
September 1995 to December 2000. Practice includes estate planning, asset protection, probate and contested estates. Experience
includes eleven years of trial practice in employment, commercial and general litigation. Licensed in Texas and New Mexico and
admitted to the federal courts in the Western District of Texas, the District of New Mexico and the United States Court of Appeals for
the Fifth Circuit.
United States District Court for the Western District of Texas, El Paso, Texas. Law Clerk for Chief Judge Harry Lee Hudspeth –
August 1994 to August 1995.
Supreme Court of the State of Texas, Austin, Texas. Intern for Justice Lloyd Doggett – January 2004 to May 2004.
Articles and Speeches:
Scheduled Course Director: 2nd Annual New Mexico State University Estate Planning Conference for Women, January –
February 2009.
Scheduled Author and Speaker: 16th Annual Estate Planning Institute. Community Foundation of Southern New Mexico –
Planning with Irrevocable Life Insurance Trusts, November 6, 2008.
2008 New Mexico State University Estate Planning Conference for Women – Legal and Practical Aspects of Estate Planning,
January 23, 2008
15th Annual Estate Planning Institute. Community Foundation of Southern New Mexico – Advanced Planning Techniques with
Incapacity in Mind, November 1-2, 2007
2007 University of Texas at El Paso Estate Planning Conference for Women – Legal and Practical Aspects of Estate Planning,
January 24, 2007.
Estate Planning for Mexican Nationals with U. S. Assets, January 2007 (Co-Author).
Education:
University of Texas School of Law, J.D. with honors, Order of the Coif – May 1994.
Texas A & M University, B.A. Economics, Magna Cum Laude – May 1990.
Civic and Religious Involvement:
Leadership El Paso Class XXIX, Greater El Paso Chamber of Commerce, El Paso, Texas. Participant, 2007.
Insights El Paso Science Museum, El Paso, Texas. Board Member – July 2006 to May 2008; Vice President – June 2004 to June
2006; Board Member – June 2002 to June 2004.
Keep El Paso Beautiful, Inc., El Paso, Texas. Vice President – 2001 to 2002; Board Member – 2000.
Beth El Bible Evangelical Free Church, El Paso, Texas. Elder – December 2001 to May 2008; Member – 1995 to present.
Memberships:
American Bar Association; State Bar of Texas; State Bar of New Mexico; Real Estate, Probate and Trust Section of the State Bar
of Texas; El Paso Bar Association; El Paso Estate Planning Council; and Southern New Mexico Estate Planning Council.
Family:
Married to Laura Davis with four daughters: Emma (9 years), Audrey (7 years), Camille (5 years) and Julia (5 years).
TABLE OF CONTENTS
I.
INTRODUCTION....................................................................................................................... 1
A Scope of Paper .................................................................................................................... 1
B. The Problem........................................................................................................................ 1
II.
DURING ADMINISTRATION – THE DRAFT GROSS ESTATE.............................................. 1
A. The Basis for Decision Making ........................................................................................... 1
B. Special Concerns Regarding Draft Schedules of the Gross Estate......................................... 1
C. Sample Forms ..................................................................................................................... 2
III.
VALUATION OF ASSETS ........................................................................................................ 2
A. Is an Appraisal Required?.................................................................................................... 2
B. The Code and IRS Regulations ............................................................................................ 2
C. Appraiser and Appraisal Standards ...................................................................................... 3
1. Appraiser Standards..................................................................................................... 3
2. Appraisal Standards ..................................................................................................... 4
D. Preparing for Possible Litigation in the Future..................................................................... 5
1. General Considerations ................................................................................................ 5
2. Admissibility of Expert Opinions ................................................................................. 5
3. The Weight of Expert Opinion Evidence...................................................................... 6
4. Lay Opinion Testimony ............................................................................................... 6
IV.
DISCLAIMERS .......................................................................................................................... 6
A. Federal Law ........................................................................................................................ 6
B. Texas Law........................................................................................................................... 7
C. Forms.................................................................................................................................. 9
V.
DOCUMENTATION OF DISTRIBUTIONS .............................................................................. 9
A. Fiduciary Duty and Documentation of Distribution.............................................................. 9
B. Baseline Documentation.................................................................................................... 10
C. Simple Documentation ...................................................................................................... 10
D. Closing Affidavits ............................................................................................................. 10
E. Family Settlement Agreements .......................................................................................... 10
F. Exchange Agreements ....................................................................................................... 11
G. Closing Memoranda .......................................................................................................... 12
VI.
CONCLUSION ......................................................................................................................... 12
Exhibit A – Sample Draft Schedules of Gross Estate ........................................................................... A-1
Exhibit B – Sample Disclaimer.............................................................................................................B-1
Exhibit C – Sample Receipt and Release ............................................................................................. C-1
Exhibit D – Sample Assignment .......................................................................................................... D-1
Exhibit E – Sample Section 151 Closing Affidavit................................................................................E-1
Exhibit F – Sample Family Settlement Agreement................................................................................F-1
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Exhibit G – Sample Exchange Agreement ........................................................................................... G-1
Exhibit H – Sample Closing Memorandum – Funding of Bypass Trust from a Disclaimer Will............ H-1
Exhibit I – Sample Closing Memorandum – Funding of Bypass Trust from Living Trust .......................I-1
Exhibit J – Sample Closing Memorandum – 706 & Fairly Representative Funding of QTIP Trust .........J-1
Exhibit K – Sample Closing Memorandum – 706 & QDOT Trust........................................................ K-1
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Drafting for the Settlement of Estates and Trusts
DRAFTING FOR THE
ESTATES AND TRUSTS
I.
SETTLEMENT
Chapter 16
During administration and at closure, the
fiduciaries (and attorneys who represent them) need an
efficient way of organizing information regarding the
estate’s assets in a meaningful way, all the while
tracking several competing interests.
Because
attorneys are typically rather intelligent and sometimes
quite creative, myriad methods of accomplishing this
task likely exist. The following is by no means
presented as the best way of accomplishing the task. It
is merely a tried method that seems to work pretty well
for one firm practicing law west of the Pecos.
OF
INTRODUCTION
A. Scope of Paper
The focus of this paper is to provide a roadmap
and a series of forms for the settlement of estates,
primarily complex estates that may or may not require
the filing of a United States Form 706 Estate (and
Generation-Skipping Transfer) Tax Return (“706”).
The paper places a special emphasis on estates in
which the funding of a Bypass/Credit Shelter Trust and
a Marital Deduction Trust are of critical importance. It
also touches upon valuation issues and disclaimers,
though it does not provide a comprehensive discussion
of either issue. The hope of the author is to provide the
audience with a discussion of the issues raised in the
closing of estates and trusts and a series of forms from
which the audience can draw for efficiently serving
their clients.
The paper will typically speak in terms of the
estate and executor.
Many of the points and
suggestions will apply with equal force to the
administration and closing of a trust at termination.
Any differences will be pointed out.
II. DURING ADMINISTRATION – THE DRAFT
GROSS ESTATE
A. The Basis for Decision Making
One cannot make wise decisions without accurate
facts that are collected in a meaningful way. The basis
for most decisions in the context of administering and
closing an estate is the gross estate’s inventory. The
probate inventory is insufficient to provide much
guidance in this process because it typically is not
comprehensive. Development of a firm grasp of the
gross estate’s assets, including the surviving spouse’s
½ community property share, and the information that
needs to be gathered to complete an accurate inventory
at the outset of administration is of vital importance.
Nine months after death may seem like a long time in
the abstract, but always seems to come faster in real
life.
Draft schedules of the gross estate assist in the
decision making process in several ways. First, they
give an overall picture of the estate. Second, they
expose whether there are sufficient assets to fund
certain gifts, especially the gift to the Bypass Trust.
Third, the draft schedule will indicate those assets, for
example joint tenancy property, which might be
available for funding gifts by way of qualified
disclaimers. Fourth, and if properly prepared, the draft
schedule also will expose those assets for which the
fiduciary should seek an appraisal and whether the
primary concern is related to estate taxes or capital
gains taxes. Finally, the schedule will assist in making
the decision to fund distributions pro rata or non-pro
rata and whether an exchange of property might be
advantageous for the family.
B.
The Problem
Typically, people do not keep their financial
affairs in nice neat packages for their executors and
successor trustees to work with when the time comes.
They do not have financial statements and current fair
market values of most of their assets readily available.
Some assets are part of the probate estate, while other
assets are in revocable or irrevocable trusts or are
controlled by beneficiary designations. Some assets
would be ideal to place in a Bypass Trust, while others
probably are better held either outright or in a
revocable trust.
During the course of administering an estate,
decisions will have to be made regarding whether
disclaimers might be recommended. For example, the
decedent may have signed a disclaimer will or his
securities broker may have erroneously recommended
that the decedent and his spouse hold their substantial
securities account as joint tenants with rights of
survivorship. The fiduciary also may be faced with the
decision as to whether to distribute assets pro rata or
non-pro rata. Valuation issues also may arise, even if
no 706 is filed, especially if assets are distributed nonpro rata or if a Bypass Trust is to be funded. From a
purely practical standpoint, the family also will want to
know what became of their loved one’s assets
(actually, they will want to know what happened with
their assets), while the IRS or other interested parties
may question a fiduciary’s decisions sometime in the
future.
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B. Special Concerns Regarding Draft Schedules of
the Gross Estate
Attorneys and their clients should take special
care to preserve the confidentiality of all draft
schedules of the gross estate. Most clients are
woefully misinformed as to the true value of their
assets, especially hard to value assets like closely held
businesses. For example, they may estimate the value
too high early in the process and before a qualified
appraisal can be obtained. Only when the qualified
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appraisal is obtained do the attorney and the client
learn that there is not a taxable estate.
The concern here is that if the confidentiality of
the draft schedule is lost, the attorney-client and work
product privileges may be lost. If so, the misinformed
estimate found in a draft schedule might provide
ammunition for an effective cross examination if the
valuation ever comes under attack.
Regardless of the careful protection an attorney
may afford a draft schedule, clients are not always so
circumspect. An attorney can protect the client from
himself or herself by careful drafting of the schedule.
The draft schedule always should indicate on its face
that it is a “draft”. It also should note those values
which are merely estimates and that appraisals should
be obtained. Such language on the face of the
document certainly would mitigate the effectiveness of
any cross-examination if confidentiality is lost.
PROB. CODE § 250 (unless the court appoints an
appraiser, the executor values the property). The
executor’s fiduciary duties toward the beneficiaries of
the estate dictate that the executor appraises the
property fairly. A fair appraisal, however, does not
require a formal opinion of value by a qualified
appraiser.
Several situations may require that the executor
arrange for a professional opinion as to value. The
relative utility of an appraisal increases as the estate’s
beneficiaries’ interests diverge and as the value of the
estate increases, especially as it approaches the
applicable credit amount. Examples of situations
likely requiring a professional appraisal include, but
are not limited to, the following:
 Funding of pecuniary bequests by making
distributions in kind;
 Funding of residuary or general bequests
through non-pro rata distributions;
 Funding of a Bypass Trust, even if pro
rata distributions are made;
 Planned exchanges between the estate and
a beneficiary, especially the surviving
spouse;
 The overall value of the estate approaches
the applicable credit amount (either to
determine whether an estate requires a
706 or to comply with 706 reporting
requirements); and
 To establish a new basis for capital gains
tax purposes.
In any of these situations, cost will be a factor.
The attorney and the client therefore will also have to
weigh the risks and costs associated with not obtaining
an appraisal with those of the appraisal itself. Many
times the decision might also be between a “cheap”
appraisal and an “expensive” one. The risks to be
weighed include the likelihood of litigation, the
likelihood that the valuation used is correct and the
costs associated with the valuation being wrong.
Interestingly, IRS guidelines suggest the IRS conducts
a similar cost/benefit and risk analysis when
approaching an examination of a business valuation.
See Internal Rev. Serv. Business Valuation Guidelines
§ 2.11, dated Jan. 14, 2002, eff. Oct. 1, 2002 (available
in Hood, 830-2nd T.M., Valuation: General and Real
Estate, Worksheet 6). That the IRS itself conducts a
similar analysis suggests in and of itself that it is a
good idea to have a well prepared appraisal supporting
any hard to value asset in the estate.
C. Sample Forms
The two sample Draft Gross Estates attached as
Exhibit A are designed to be used in the typical estate
in which a surviving spouse is left and the deceased’s
plan called for a Bypass and Marital Deduction Trust.
The author typically creates the schedule when first
hired based on the information provided by the client
as to the decedent’s assets.
As more detailed
information is developed regarding the estate’s assets,
the schedule is updated. Comments can be inserted
showing those assets for which more information is
required.
The first draft schedule was created based on the
client’s estimates and without the benefit of qualified
appraisals. As can be seen, based on the initial
information obtained, it appeared that a 706 likely
would have to be filed. Further, the Will was drafted
in 1985 and was a disclaimer Will. Therefore, unless
the surviving husband disclaimed his interests under
the Will, no assets would be available to fund the
Bypass Trust. Also, much of the family’s assets were
held as joint tenants with rights of survivorship,
leaving very little available for funding the Bypass
Trust without a disclaimer of those assets as well. The
second draft schedule is for the same estate, but shows
the information updated with qualified appraisals and
other information that guided the decision making
process for both whether a 706 should be filed and the
funding of the Bypass Trust.
The draft schedule will form the building blocks
of the closing memoranda discussed later in this
Article.
B.
The Code and IRS Regulations
Nothing in the Code expressly requires that a
taxpayer provide an appraisal prepared by a qualified
appraiser in connection with a 706 or with closing an
estate. See Code § 2031 (subsection (b), however,
III. VALUATION OF ASSETS
A. Is an Appraisal Required?
Under Texas law and in a typical independent
administration, the executor is the person who
appraises the value of the estate’s assets. See TEX.
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suggests an appraisal would be appropriate to
determine the value of unlisted stock and securities).
The regulations, however, either require appraisals or
impose requirements on valuations that are, for all
intents and purposes, appraisals. See, e.g., 26 C.F.R.
(“Regs.”) §§ 20.2031-2(f) (valuation of stock when
prices not readily available); 20.2031-3 (valuation of
business interests); and 20.2031-6 (valuation of
personal and household effects). Even if a formal
appraisal is not required by the regulations, appraisals
are advisable, from a practical standpoint, for hard to
value items in the context of almost any 706.
For example, Code Section 7491 addresses the
burden of proof in tax cases. Taxpayers who present
“credible evidence with respect to any factual issue
relevant to ascertaining the [taxpayer’s] liability” are
able to shift the burden of proof to the IRS. Code §
7491(a)(1). The burden shifts, however, only if the
taxpayer also substantiated the item in dispute and
reasonably cooperated with the IRS’s requests for
witnesses and documentation. Id. § 7491(a)(2). Courts
have applied Code Section 7491’s burden shifting to
valuation cases. See, e.g., Dailey v. Commissioner,
T.C. Memo 2001-263 (2001). It seems that a taxpayer
armed with a well drafted and documented appraisal
will be much more likely able to shift the burden of
proof than one who decided not to spend the money up
front.
Further, Code Section 6662(a) imposes a
substantial penalty of 20% of the underpayment if the
value of an asset is underreported by 65% or less of the
value ultimately determined to be correct. The penalty
increases to 40% if the undervaluation is 40% or less
than the true value. The taxpayer can escape the
penalty, however, if the taxpayer had “reasonable
cause” for the underpayment and acted in “good faith”.
Code § 6664(c)(1). Reliance on professional advice,
that is, a qualified appraisal, can provide the necessary
reasonable cause. At a minimum, the taxpayer must
show the appraisal (1) was “based on all pertinent facts
and circumstances and the law as it relates to those
facts and circumstances”; (2) was not based on
unreasonable assumptions and did not unreasonably
rely on the taxpayer’s information; and (3) was not
based on the invalidity of a regulation. Regs. § 1.66644(b).
The Second Circuit provides further guidance in
Thompson v. Commissioner, 499 F.3d 129 (2d Cir.
2007). In Thompson, the Tax Court had refused the
Code Section 6662 penalty based on the taxpayer’s
reliance on a business valuation prepared by
professional appraisals. Id. at 134. The Court of
Appeals, however, reversed the Tax Court because it
had not addressed whether the taxpayer had reasonably
relied on its valuation expert and whether it knew or
should have known the expert did not have the
necessary expertise to value a company located in New
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York. Id. at 135.
A second penalty potentially applies almost any
time there is an underpayment simply because the
taxpayer did not obtain an appraisal. Code Section
6662(b)(1) imposes a 20% penalty on the
underpayment if the underpayment is attributable to
negligence. Negligence in this context means:
 Failure to make a reasonable attempt to
comply with the Code;
 Failure to exercise ordinary and
reasonable care in preparing the return,
including the failure to substantiate items
properly; and
 Failing to establish a “reasonable basis”
for an item in the return.
Regs. § 1.662-3(b)(1). “Reasonable basis” is a
relatively high standard that goes beyond a merely
arguable or colorable claim. Id. § 1.662-3(b)(3).
Given the standards in this regulation, it very well may
be negligence to fail to obtain a professional’s
appraisal of hard to value assets when the payment of
taxes might turn on the value of that asset. Because
valuation is so subjective, professional appraisals
should be obtained in such circumstances.
C. Appraiser and Appraisal Standards
1. Appraiser Standards
A detailed discussion of the standards for
appraisers and appraisal reports is beyond the scope of
this paper. Attorneys advising executors and trustees
should, nevertheless, keep in mind several basic issues
when seeking out professional appraisers and
reviewing draft appraisals before acceptance.
The IRS Regulations do not provide guidance in
the context of estate or generation-skipping transfer
taxes. Regulations in the gift tax arena provide that
guidance and, as a practical matter, probably should be
followed in other areas as well.
See Regs. §
301.6501(c)-1(f) (setting the standards for adequate
disclosure in the context of triggering the statute of
limitations for gift tax returns).
Under section 301.6501(c)-1(f) and at a minimum,
the appraiser must satisfy the following:
 The appraiser is an individual holding
himself or herself out to the public as an
appraiser, or performs appraisals on a regular
basis;
 The appraiser is qualified to make
appraisals of the type of property at issue by
virtue of the appraiser’s background,
experience, education and memberships in
professional appraisal associations, if any;
and
 The appraiser is not a family member of
the donor’s family or a person employed by
the donor’s family.
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Regs. § 301.6501(c)-1(f)(3)(i). One issue raised by
these standards is whether the family’s CPA firm
might be the right choice for preparing the valuation of
the decedent’s closely held business. While the
regulations do not apply, technically, to disqualify the
family’s CPA firm to act as an appraiser, a long time
relationship does raise questions as to impartiality.
The regulations also contain specific requirements
for appraisers of certain types of objects. For example,
appraisers of household and personal effects must be
“reputable and of recognized competency to appraise
the particular class of property involved.” Regs. §
20.2031-6(d). The numerous and difficult to determine
factors required to be considered in valuing small
businesses also, by necessity, require a certain level of
competency and experience for appraisers as well. See
Id. §§ 20.2031-2(f), 20.2031-3 (the factors to be
considered are discussed below). An attorney’s failure
to ensure that competent appraisers are hired may
produce disastrous results.
etc.
Regs. § 301.6501(c)-1(f)(3)(ii). Revenue Procedure
66-49, which was decided in the context of the income
tax, provides further guidance as to the type of
information that any appraisal should include. The
procedure requires:
 A summary of the appraiser’s
qualifications;
 A statement of the value including the
appraiser’s definition of value;
 The bases for the opinion, including a
description of any restrictions regarding the
use or disposition of the property;
 The valuation date; and
 The appraiser’s signature and date of the
appraisal.
Rev. Proc. 66-49.
Care should be taken to ensure the appraiser uses
the correct definition of fair market value, which can
change, depending on the context. For purposes of
estate tax returns, “fair market value” means, as of the
date of death, “the price at which the property would
change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to
sell and both having reasonable knowledge of relevant
facts”. Regs. § 20.2031-1(b). All appraisals should
indicate use of this definition of fair market value.
Clearly, any appraisal of an item should address
the issues raised in the regulations for that type of item,
if any. The general principles for valuation set forth in
section 20.2031-1(b) of the regulations, for example,
set forth examples of how to return values of certain
items, like automobiles, livestock and crops. They also
typically require that values be returned on an itemized
basis, rather than for lots. Regs. § 20.2031-1(b). Also,
the executor must take several factors into
consideration in valuing stock and other business
interests for which there is no ready market. Id. §§
20.2031-2(f)(1), (2) (the other relevant factors include
the company’s net worth, prospective earning power,
good will, economic outlook, management, and nonoperating assets); 20.2031-3 (same). Revenue Ruling
59-60 also must be consulted in connection with any
valuation of a small business. It sets forth the
appropriate methods for valuing a company, the
specific factors for consideration, and the weight to
accord to various factors. Rev. Rul. 59-60. Also,
section 20.2031-6(d), which governs valuation of
personal and household effects, contains specific
requirements for the appraisals of certain types of
items like books, oriental rugs, paintings and silver.
Any appraisal that ignores these requirements (or fails
to include them because of oversight) will be subject to
attack.
2.
Appraisal Standards
To be considered adequate, the appraisal itself
must contain the following information (again, in the
context of adequate disclosure for gift tax returns,
which should provide guidance for estate tax returns):
 The date of the transfer, the date on
which the transferred property was appraised,
and the purpose of the appraisal;
 A description of the property;
 A description of the appraisal process
employed;
 A description of the assumptions,
hypothetical conditions, and any limiting
conditions and restrictions on the transferred
property that affect the analyses, opinions,
and conclusions;
 The
information
considered
in
determining the appraised value, including in
the case of an ownership interest in a
business, all financial data that was used in
determining the value of the interest that is
sufficiently detailed so that another person
can replicate the process and arrive at the
appraised value;
 The appraisal procedures followed, and
the reasoning that supports the analyses,
opinions, and conclusions;
 The valuation method utilized, the
rationale for the valuation method, and the
procedure used in determining the fair market
value of the asset transferred; and
 The specific basis for the valuation, such
as specific comparable sales or transactions,
sales of similar interests, asset-based
approaches, merger-acquisition transactions,
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Sample appraisals for real estate can be found at
Worksheets 1 through 5 of Hood, 830-2nd T.M.,
Valuation: General and Real Estate (2003).
Rule 702 of the Federal Rules of Evidence
governs the admissibility of expert opinions. The rule
also is applicable in the Tax Court. TAX CT. R. 143.
The rule states, in whole part:
D. Preparing for Possible Litigation in the Future
1. General Considerations
Litigation over the value of an asset, or the value
of the entire estate, probably is very far from the minds
of most executors and the attorneys who represent
them, especially when no 706 is being filed. The risk
of any valuation, however, is that someone, perhaps a
beneficiary or the IRS, will question the valuation, and
litigation will ensue.
The best course in the context of any actual
litigation is to prepare the case as if it will go to trial
despite the likelihood of settlement. Such preparation
will ensure the best prosecution or defense of the
matter regardless of when and whether the case settles.
A similar attitude of preparation should be taken in the
context of closing estates. Granted, the likelihood that
any particular estate might be involved in future
litigation may be very small. The potential harm to the
estate, however, can be very great, especially for
taxable estates and those that may or may not be
taxable depending on a valuation of a particular item.
Therefore, valuations and the engagement of appraisers
should be viewed with an eye towards the future
possibility of a fight.
While an expert witness as to valuation typically
can be hired well after actual litigation has begun (see
FED. R. CIV. P. 26(a)(2)(C) (absent court order, expert
witness disclosures due 90 days before trial)), that
expert witness almost certainly will be at a
disadvantage as compared to the witness who was
hired to prepare the valuation in the first place. The
disadvantage arises because of the passage of time.
The only values that are of relevance are those as of the
date of death (or six months later if an alternate
valuation date is chosen) and the date of distribution,
especially in the context of fairly representative nonpro rata distributions. See Code §§ 2031(a) (date of
death value); 2032 (alternate valuation date); Rev.
Proc. 64-19 (fairly representative funding). These
dates tend to be well in the past by the time litigation
has begun. In the meantime, markets have changed,
the real estate might have been developed, or the
business may have changed its focus and management.
If the expert is unable to base his or her opinion on
relevant facts, the opinion will be worthless.
Therefore, the attorney advising an executor closing an
estate or filing a 706 should keep in mind the rules
regarding admissibility of expert opinions at trial and
make every effort to obtain an admissible opinion from
the outset.
2.
If scientific, technical, or other
specialized knowledge will assist
the trier of fact to understand the
evidence or to determine a fact in
issue, a witness qualified as an
expert by knowledge, skill,
experience, training, or education,
may testify thereto in the form of
an opinion or otherwise, if (1) the
testimony is based upon sufficient
facts or data, (2) the testimony is
the product of reliable principles
and methods, and (3) the witness
has applied the principles and
methods reliably to the facts of the
case.
FED. R. EVID. 702. An appraiser’s opinion typically
falls under either technical or specialized knowledge
that would assist in determining the fact at issue. In
the seminal cases, Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579, 589 (1993)
(scientific knowledge) and Kuhmo Tire Co. v.
Carmichael, 526 U.S. 137, 141 (1999) (technical and
specialized knowledge), the Supreme Court introduced
the now standard concept that the trial judge acts as a
gate keeper for evidence introduced under the guise of
expert opinion. The Texas Supreme Court also
adopted essentially the same standard in E.I. du Pont
de Nemours & Co. v. Robinson, 923 S.W.2d 549, 55657 (Tex. 1995). Under these standards, the trial judge
is required to determine that the proffered evidence is
both relevant and reliable. Kuhmo Tire Co., 526 U.S.
147. The Tax Court regularly takes on the role as the
gate keeper and excludes expert evidence as unreliable.
See, e.g., Estate of Noble v. Comm'r, T.C. Memo 20052 (2005) (excluding expert report because unreliable).
The attorney must refrain from participating too
much in any expert appraisal. In at least two cases, the
Tax Court has excluded the taxpayer’s expert valuation
report as unreliable because the evidence suggested the
report was tainted by significant participation in the
report’s preparation by the taxpayer’s counsel. See,
e.g., Estate of Noble v. Comm'r, T.C. Memo 2005-2
(2005); Bank One Corp. v. Comm'r, 120 T.C. 174
(2003). For a report to be reliable, the expert’s report
must be the expert’s report, not the attorney’s.
Communications between the taxpayer’s counsel
and the appraiser who ultimately acts as an expert
witness will be discoverable.
FED. R. CIV. P.
26(a)(2)(B)(ii) (parties must disclose “the data or other
information considered by the [expert] witness in
Admissibility of Expert Opinions
869791 v1
5
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forming” his or her opinions). Attorney work product
also may not work to protect the attorney’s own notes
when merely closing an estate in most cases. The work
product doctrine only applies to protect documents and
tangible things prepared in anticipation of litigation.
Id. 26(b)(3)(A). At the stage of closing an estate, it
would be difficult to establish that the taxpayer was
anticipating litigation other than from a purely
theoretical standpoint. Therefore, the attorney must
take great care in communicating with the potential
expert witness so as not to taint the expert’s opinion
and create unnecessary cross examination material.
 Has the witnessed been censured or
disciplined by his or her credentialing
agency?
The list could go on. The point is that attorneys should
investigate their valuation experts before becoming
committed to them.
4.
Lay Opinion Testimony
Under the Federal Rules of Evidence, lay opinion
testimony is admissible under certain circumstances.
FED. R. EVID. 701. A non-expert witness may testify
as to opinions, but only those “which are (a) rationally
based on the perception of the witness, and (b) helpful
to a clear understanding of the witness' testimony or
the determination of a fact in issue”. Id. Lay opinion
testimony is not, however, admissible if it is based on
technical or specialized knowledge that would
otherwise be within the purview of an expert’s
testimony. Id. Given that the regulations regarding
valuation are, at times, somewhat technical, it seems
that it would be a tactical mistake to rely solely on lay
opinion testimony in a valuation dispute.
3.
The Weight of Expert Opinion Evidence
All appraisers should be evaluated for factors that
go beyond price and the appraiser’s willingness to
provide a favorable opinion. (Rather than a favorable
opinion, smart attorneys seek honest opinions based on
facts and law regardless of whether the opinion is
favorable. Besides being what should be considered
anathema, mere “favorable” opinions only serve as
fodder for effective cross examinations and ruin the
credibility of the party utilizing them.)
Among the plethora of issues to consider is
whether the proposed expert will appear to be
disinterested to the fact finder. The Tax Court has, for
example, discounted an appraiser’s opinion because of
a long time business relationship with the decedent and
the decedent’s family, providing another reason to seek
an independent appraiser. See Estate of Dougherty v.
Comm’r, T.C. Memo 1990-274 (1990).
Other factors to consider when engaging a
valuation expert center on the issue of whether the
expert “makes a good witness”. Issues to consider
include:
 Is the appraiser articulate?
 Does the appraiser seem credible when
speaking?
 How does the appraiser react under
pressure, especially when cross examined?
 Does the appraiser have credentials?
 Do other appraisers recognize the
credentials as meaningful?
 Has the appraiser been published? In
the area of concern? Do the published
articles corroborate the opinion in this case?
 Has he or she testified before?
 If so, has the witness testified for
taxpayers exclusively?
 How does the appraiser’s fee compare to
fees in the marketplace for appraisals?
 If the fee is higher than average, does
the appraiser’s education or experience
warrant the higher fee?
 Has the appraiser been convicted of a
felony or a crime involving dishonesty?
869791 v1
IV. DISCLAIMERS
The closing of any estate might include the use of
disclaimers, which can provide an effective way to
engage in post mortem planning. A disclaimer is a
formal renunciation of a gift or distribution by the
recipient that is treated as being effective on the date of
the gift. The effect is such that the property will pass
to someone other than the originally intended recipient,
perhaps a trustee or another family member. Well
drafted estate plans anticipate the possibility of a
disclaimer and thereby provide flexibility to make
decisions on facts rather than assumptions about what
the future might hold.
Disclaimers are governed by both federal and
state law, both of which will be discussed in turn,
below. As will be noted, the requirements under the
two bodies of law are slightly different. Attorneys
should consult both federal and state law to ensure
compliance with both.
A. Federal Law
Code section 2518 and related regulations, Regs.
§§ 25.2518-1 through 25.2518-3, govern disclaimers
for federal succession tax purposes. For federal tax
purposes, a disclaimer is qualified (i.e., effective) if it
satisfies the following five tests:
 The disclaimer is irrevocable and
unqualified;
 The disclaimer is in writing and
adequately describes the disclaimed property;
 The legal representative of the
transferor, the holder of legal title to the
property, or the person in possession of the
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property receives the disclaimer within nine
months of the transfer;
 The disclaimant has not accepted the
property interest or any of its benefits; and
 The disclaimed property passes without
the disclaimant’s direction either to a third
party or the transferor’s spouse.
Code § 2518(b); Regs. § 25.2518-2(a). While not
specifically required by either the Code or the
regulations, the best practice is to ensure that the
disclaimer is effective under state law as well. See
Cline, 848-2nd T.M., Disclaimers—Federal Estate, Gift
and Generation-Skipping Tax Considerations, § III(B)
(2005); cf. Regs. § 25.2518-1(c) (a disclaimer may be
qualified for federal purposes even if it does not
comply with state law, under certain circumstances).
For the writing to be sufficient, it must describe
the disclaimed property and be signed. Regs. §
25.2518-2(b)(1). Generally, the disclaimer must be
delivered within 9 months of the transfer (typically the
date of death in the context of estates). Id. §§ 25.25182(c)(1) (time limit), 25.2518-2(c)(3) (determination of
the date of transfer). The 9 month period is calculated,
however, from the date the disclaimant attains the age
of 21 for minors. Id. § 25.2518-2(c)(1)(ii). The
regulations also anticipate that the minor might
otherwise have accepted the benefits of the transfer
before that time and protect the minor from a
disqualification based on this reason. See Id. §
25.2518-2(d)(3).
The mailbox rule applies to disclaimers. Regs. §
25.2518-2(c)(2). A timely mailing of a disclaimer to
the legal representative of the transferor or possessor of
the property, which also satisfies the requirements of
section 301.7502-1 of the regulations, is timely for
purposes of qualified disclaimers. Id. The safest way
to mail an item under the mailbox rule is by registered
or certified mail. See Regs. § 301.7502-1(eliminating
the risk that the envelope might be postmarked after
the deadline).
The regulations also recognize that the 90th day
might fall on a weekend or holiday. Delivery is timely
if it is made on the first day following the weekend or
legal holiday. Regs. § 25.2518-2(c)(2).
Sometimes,
successive
disclaimers
are
advantageous. That is, both the first named beneficiary
and the person taking as a result of the disclaimer must
both disclaim for the desired result to occur. In such a
situation, both disclaimers must satisfy the same time
deadlines. Regs. § 25.2518-2(c)(3).
Acceptance is probably the most fluid of concepts
with respect to disclaimers under federal law. The
regulations define acceptance as “an affirmative act
which is consistent with ownership of the interest in
property”. Regs. § 25.2518-2(d)(1). Examples of
acceptance include using the property, accepting
dividends, interests or rents from the property and
869791 v1
directing others to act with respect to the property. Id.
The exercise of a power of appointment also is an
acceptance, as is the acceptance of consideration for
making the disclaimer. Id.
Fortunately, the regulations draw a sharp
distinction between the capacities in which the
beneficiary of the property might be acting. For
example, a joint tenant in real property will not be
deemed to accept the deceased’s interest in the
property merely because he or she continued
occupying the property. Regs. § 25.2518-2(d)(1).
Further, a fiduciary, who also is a beneficiary, may act
with respect to the property without being treated as
having accepted the property. Id. § 25.2518(d)(2).
Fifth Circuit case law also clarifies that in the context
of community property, the surviving spouse may
continue to use his or her one-half of the community
estate without fear of being deemed to have accepted
the deceased spouse’s one half. Estate of Delaune v.
U.S., 143 F.3d 995, 1005 (5th Cir. 1998); also see Regs.
§ 25.2518-2(d)(4), Ex. 8.
If a person makes a qualified disclaimer, the
property is treated as if the property had never been
transferred to the disclaimant. Regs. § 25.2518-1(b).
Instead, the property is treated as passing directly from
the transferor to the person who would have received
the property if the disclaimant had not survived the
transferor. Id. Disclaimers that are qualified under
federal law are effective despite that they may not be
effective under local law, but only if the property is
nevertheless transferred without direction on part of the
disclaimant. Id. § 25.2518-1(c).
B.
Texas Law
Section 37A of the Texas Probate Code and
section 112.010 of the Texas Trust Code govern
disclaimers in Texas and seem designed to ensure that
a Texas disclaimer also is a qualified disclaimer under
federal law. The Probate Code governs disclaimers in
all situations except the disclaimer of a nontestamentary trust, while the Trust Code governs
disclaimers of all non-testamentary trust interests.
TEX. PROB. CODE § 37A(e); TEX. PROP. CODE §
112.010(b) (disclaimers of testamentary trust governed
by the Probate Code). There are a few differences
between the Probate Code and the Trust Code, which
will be noted, below.
To comply with the Texas statutes, a disclaimer
must:
 Be written and acknowledged before a
notary public;
 Be filed in the probate court where the
decedent’s will is being probated, if any, or
with the county clerk where the decedent
resided;
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satisfy the state statute, an attempt to satisfy the federal
requirements can still be made.
Any person may disclaim any type of property
interest, including survivorship interests and beneficial
interests under life insurance and retirement account
beneficiary designations. TEX. PROB. CODE § 37A(a),
(e); TEX. PROP. CODE § 112.010(c). Disclaimers may
be partial or relate only to specific powers related to
the property interest. TEX. PROB. CODE § 37A(l); TEX.
PROP. CODE § 112.010(c-2). Spouses also may
disclaim an interest without, by necessity, disclaiming
a beneficial interest in the same property that might
pass to him or her because of the disclaimer. Id. §
37A(m). A disclaimer will, which provides for an
outright gift to the surviving spouse and a gift to a trust
for the benefit of the same spouse if he or she
disclaims, is a prime example of the spouse’s power to
disclaim only in part. Also see TEX. PROB. CODE §
37A(j) (specifically allowing alternative dispositive
provisions in testamentary instruments anticipating
disclaimers). The person who otherwise would receive
the disclaimed property interest also may disclaim. Id.
§ 37A(f).
An independent executor may disclaim on behalf
of the deceased without court approval. TEX. PROB.
CODE § 37A(a); TEX. PROP. CODE § 112.010(c)(3).
Certain complications may arise in the context of all
disclaimers except non-testamentary trusts, however, if
the person disclaiming is not a person with capacity.
Section 37A(a) requires that the guardian of an
incapacitated person disclaim with court approval.
Also see TEX. PROP. CODE § 112.010(c)(2) (speaking
in terms of the “personal representative” of the
incapacitated person). Because a minor is an
“incapacitated person” under the Probate Code, a
formal guardianship and court approval would be
required for a minor to disclaim property even though
both parents might be alive and acting in the best
interest of their child. See TEX. PROB. CODE § 601(14)
(defining “incapacitated person”).
Given that a
minor’s disclaimer is qualified for federal tax purposes
if it is delivered within 9 months of the disclaimant’s
21st birthday, however, the guardianship requirement
might not pose as great an obstacle as appears at first
glance.
See Regs. § 25.2518-2(c)(1)(ii).
Unfortunately, Texas law does not seem to anticipate
the logistical problems associated with filing a
guardianship and obtaining court approval of a
disclaimer, all within 9 months of a death. Despite the
savings provision found in section 25.2518-1(c) of the
regulations, the lack of foresight in this area certainly
will create uncertainty for a subset of Texas
disclaimants. Cf. TEX. PROP. CODE § 112.010(c2)(2)(B) (for non-testamentary trusts, the time limit is
the same as under federal law).
A disclaimer in compliance with the Texas statute
is effective as of the date of the death that triggered the
 Be delivered in person or by registered
or certified mail to and received by the legal
representative of the transferor of the interest
or the holder of legal title to the interest;
 Be filed and delivered as described
above within nine months of the death
triggering the disclaimed transfer; and
 Be completed before the disclaimant
accepts (i.e., takes possession of or exercises
dominion or control over) the property in his
or her capacity as a beneficiary.
TEX. PROB. CODE §§ 37A(g), (h), (i), (n); TEX. PROP.
CODE § 112.010(c-2) (for non-testamentary trusts).
There are several major differences between
Texas and federal law. The first and most critical
difference is that Texas law requires filing of the
disclaimer for it to be effective, while federal law does
not. Compare TEX. PROB. CODE § 37A(h) (requiring
filing) and Regs. § 25.2518-2(a) (no filing
requirement); cf. TEX. PROP. CODE § 112.010(c-2)
(filing is not required for non-testamentary trusts). The
second difference is that federal law requires the
disclaimer to be both irrevocable and unqualified.
Regs. § 25.2518-2(a)(1). While disclaimers filed under
Texas law are irrevocable by default, see TEX. PROB.
CODE § 37A(k); TEX. PROP. CODE § 112.010(d), they
are not necessarily unqualified. Texas law also has no
provision suggesting a mail box rule for delivery. See
TEX. PROB. CODE §§ 37A(h), (i); TEX. PROP. CODE §
112.010(c-2)(2). Finally, federal law allows a minor to
file a qualified disclaimer within 9 months of his or her
21st birthday. Regs. § 25.2518-2(c)(ii). Texas law,
with respect to all interests except beneficial interests
in non-testamentary trusts, has no similar provision and
likely requires a minor’s parent to seek appointment as
a guardian and obtain court approval of the disclaimer,
all within 9 months of the triggering event. TEX.
PROB. CODE § 37A(a); cf. TEX. PROP. CODE §
112.010(c-2)(2)(B) (for non-testamentary trusts,
deadline for delivery of disclaimer is 9 months after
beneficiary attains age 21).
The safest course is for the disclaimant to ensure
the disclaimer satisfies both federal and state law.
Federal law is somewhat generous, however, when it
comes to disclaimers. As pointed out above, a
disclaimer might s t i l l be qualified for federal
succession tax purposes even if it is not effective under
local law. Regs. § 25.2518-1(c). If under local law,
the disclaimed property is transferred without direction
of the disclaimant despite that it does not satisfy local
law, the disclaimer is nevertheless treated as a qualified
disclaimer. Id. Under Texas law, a disclaimer that
does not comply with the statute still operates to
transfer the disclaimed property interest. TEX. PROB.
CODE § 37A(d); TEX. PROP. CODE § 112.010(e).
Therefore, even if a disclaimer might not technically
869791 v1
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Chapter 16
transfer of property to the disclaimant. TEX. PROB.
CODE § 37A(b); TEX. PROP. CODE § 112.010(d).
Texas disclaimers also are irrevocable, regardless of
whether the document so states. TEX. PROB. CODE §
37A(k); TEX. PROP. CODE § 112.010(d). Finally, even
if the disclaimer does not comply with the statute as a
disclaimer, it is nevertheless effective as an irrevocable
transfer of the disclaimed property. TEX. PROB. CODE
§ 37A(d); TEX. PROP. CODE § 112.010(e). As noted
above, this provision acts as a savings provision when
the disclaimer might still qualify under federal law.
When the disclaimer also fails under federal law,
however, disastrous results may incur. The ineffective
disclaimer ends up as a gift and likely will have
adverse gift tax consequences for the person that
attempted to disclaim.
Tax planning is not the only reason one should
consider disclaimers. As is made clear under the
statute, a disclaimer relates back to the date of the
transferor’s death and is not subject to the claims of the
disclaimant’s creditors. TEX. PROB. CODE § 37A(b);
TEX. PROP. CODE § 112.010(d). Given that one may
make a disclaimer up to 9 months after the death of the
transferor, one might make the disclaimer knowing full
well that he or she is facing significant creditor claims.
Despite knowledge of the creditor’s claims, a
disclaimer is not, however, a fraudulent transfer and
can be used to protect assets a person would otherwise
have inherited from creditor claims by allowing them
to pass to children or other relatives. See TEX. BUS. &
COM. CODE § 24.002(12) (defining “transfer” under
the Uniform Fraudulent Transfer Act as specifically
excluding disclaimers).
will be exposed to claims of a breach of fiduciary duty
to which he or she will be unable to respond.
Documentation of issues related to valuation,
especially in conjunction with funding trusts that
provide a means of bypassing the primary beneficiary’s
estate for estate tax purposes, also will well serve the
fiduciary. The greater the level of care taken towards
documentation, the greater protection the fiduciary will
enjoy.
Probably the most important thing a fiduciary can
do when closing an administration is to organize
papers relating to the estate or trust into some
semblance of order. The more ordered a file appears to
be, the greater comfort that an unhappy beneficiary
will have as to whether the fiduciary acted properly. In
contrast, the only thing an unkempt file can accomplish
is to cause frustration and raised eyebrows. The
ordered file also will aide in responding to inquiries
that may come long after a fiduciary has completed his
or her tasks. See TEX. CIV. PRAC. & REM. CODE §
16.004(a)(5) (statute of limitations for breach of
fiduciary duty is 4 years).
Ideally, the fiduciary will document the closing of
the estate with a closing memorandum, which both
brings all the information regarding the estate’s assets,
its administration and the decisions made as to making
elections related to taxation and funding to one place
for ready reference in the future. Of course, the
expense of preparing an all encompassing
memorandum may cause shock to some fiduciaries,
even after a well presented explanation as to the
benefits of the memorandum. Alternatives exist and all
will be discussed below.
C. Forms
Attached as Exhibit B is a form disclaimer under
TEX. PROB. CODE § 37A. It is designed to be flexible
and usable in several situations and complies with both
federal and state law.
A. Fiduciary Duty and Documentation of
Distribution
Both executors (and administrators of intestate
estates) and trustees owe a fiduciary duty to the
beneficiaries. Humane Soc. of Austin & Travis County
v. Austin Nat'l Bank, 531 S.W.2d 574, 580 (Tex. 1975)
(executors and administrators); Montgomery v.
Kennedy, 669 S.W.2d 309, 313 (Tex. 1984) (trustees).
That duty includes the duty of “full disclosure of all
material facts known to the [fiduciary] that might
affect the beneficiaries' rights”. Punts v. Wilson, 137
S.W.3d 889, 891-92 (Tex. App.—Texarkana 2004, no
pet.). Similarly, a fiduciary also “owes its principal a
high duty of good faith, fair dealing, honest
performance, and strict accountability”. Ludlow v.
DeBerry, 959 S.W.2d 265, 279 (Tex. App.--Houston
[14th Dist.] 1997, no writ). The possible existence of
strained relationships between the fiduciary and the
beneficiaries does not alter the duty of full disclosure.
Montgomery, 669 S.W.2d at 313. The only time the
fiduciary duty might be minimized, from a practical
standpoint, is when the fiduciary happens to be the
only beneficiary.
V. DOCUMENTATION OF DISTRIBUTIONS
Independent executors can be lulled into a sense
of complacency regarding record keeping given that
they have no statutory duty to file either an annual or
final account, unless an interested party demands one.
See TEX. PROB. CODE §§ 149A (interested party may
seek accounting 15 months after letters testamentary
distributed), 149B (after 2 years, interested party may
seek accounting and distribution). Trustees who are
not corporate trustees also may fall into the same trap
if the beneficiaries do not request annual accounts. See
TEX. PROP. CODE § 113.151 (trustees must provide
annual accounts only on demand).
From the perspective of the fiduciary, however,
documentation of the estate or trust can be, perhaps,
one of the more important tasks during administration.
Without some level of documentation, the fiduciary
869791 v1
9
The primary reason for documenting the
distribution of an estate or trust is to bring closure for
the fiduciary and to cut off exposure to possible future
claims. The fiduciary cannot, however, fail to disclose
facts about which he might be aware and expect a
release or documentation to protect him. The mere
failure to disclose is in and of itself actionable.
B.
Baseline Documentation
Most estates have at least some base line
documentation. The most complete base line for an
estate is a filed 706 and associated closing letter. In
those estates which have a 706, the return will form the
basis for documenting distribution of the estate. Only
a small fraction of estates, however, file a 706.
All probated estates will include an inventory that
is approved by the court. See TEX. PROB. CODE § 250.
The inventory will not include, however, real property
located outside the State of Texas. Id. § 250(a). The
inventory also will not include property that was not
part of the probate estate; and the fiduciary who
receives a portion of the non-probate property may
have reasons to document the distribution of those
assets as well.
Many estates are not probated at all. There is no
legal reason, for example, to probate a will when the
estate does not include real estate or property in the
possession of third party custodians who require letters
testamentary before releasing the property to the heirs.
(The most common examples of the later type of
property are bank and securities accounts that are not
held as joint tenants with rights of survivorship.) The
estate still may have significant assets for which the
fiduciary may want to prepare documentation to avoid
future disputes.
Also, more Texas residents are turning to living
trusts for their estate plans. If they are actually
successful in transferring all their property to
themselves as trustees before they die, no probate will
be necessary even if they owned real estate or bank or
securities accounts. In these types of situations, there
will be no base line documentation unless the fiduciary
otherwise decides to create it.
C. Simple Documentation
The simplest type of documentation will consist
of the baseline documentation mentioned above and
receipts executed by the distributees. The receipts may
or may not itemize the property received by the
distributee. Distribution deeds for real estate and
assignments from the estate or trust to the distributee
also may be appropriate depending on the type of
property in the estate. A sample receipt is attached at
Exhibit C, while a sample assignment is attached at
Exhibit D.
D. Closing Affidavits
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Chapter 16
The Probate Code, section 151, provides for
closing an estate by affidavit. The closing affidavit
will include a simple accounting of the estate,
including a description of distributions. TEX. PROB.
CODE § 151(a). The affidavit also will include receipts
from the distributees or other proof of delivery, if any.
Id. § 151(a)(2). The closing affidavit closes the estate
and relieves the executor from further administrative
duties. Id. § 151(b). It does not, however, relieve the
executor from liability for breaches of trust related to
the estate. Id. The closing affidavit should be
sufficient documentation of distribution for most
estates. A sample closing affidavit is attached at
Exhibit E.
The practice in many locales, however, is to not
file closing affidavits in most probates. The primary
reason may be related to cost (typically, there are no
attorneys’ fees associated with filing nothing). A
secondary rationale is that the estate does not have to
be reopened in the future if property is discovered at a
later time.
E.
Family Settlement Agreements
Sometimes, estates are messy. Record ownership
of the family land among the family members can be
unclear for a variety of reasons. One or more of the
family members also may have claims of one nature or
the other against the others. For example, a wealthy
family member may have claims for reimbursement
related to payment of expenses and taxes related to the
family land on behalf of those family members who
could not afford the payments. To avoid future
litigation, the only answer is a family settlement
agreement.
Texas law and public policy favor settlement of
disputes. A sample family settlement agreement is
attached at Exhibit F.
A few comments about the sample:
The recitals are intended to provide background
and context to the dispute. The facts of the particular
matter for which the sample was drafted was
particularly complex and required detailed recitation to
ensure the matter was settled. The circumstances of a
particular matter will dictate the level of detail that is
required.
Paragraph 6 – Disclaimer. As we know from the
discussion about disclaimers above, the contemplated
disclaimer will not be a qualified disclaimer because of
the consideration involved.
Paragraph 7 - Mutual Release. It may not be clear
at the time that all parties to a settlement agreement
have potential claims. Nevertheless, mutual releases
are important to bring closure to the matter.
Paragraph 8 – Assignment of Released Claims.
Here, the releasing party is assigning any claims he or
she may have to the party against whom the claim
10
exists. This provision is essentially a belt and
suspenders approach to the settlement of claims. It is
not required for the settlement to be enforceable, but
some attorneys feel more comfortable if it is included.
Paragraph 9 – Forbearance. The releasing party,
in this paragraph, is promising not to assert claims in
the future. While this provision also is part of the belt
and suspenders approach, it actually adds a
disincentive designed to give the released party a
breach of contract claim against the other for merely
attempting to bring a claim in the future.
Paragraph 10 - Indemnity and Defense. The
releasing party is promising, in this paragraph, to both
indemnify and defend the released party for any claim
brought by anyone arising out of the claims that were
released. The provision is in all capital letters to make
it conspicuous, which probably is a common law
requirement for indemnity provisions to be
enforceable. It adds a disincentive to allowing a third
party to bring the claim in the future. Of course, the
provision, like many in any settlement agreement, is
only a piece of paper if the releasing party has no
assets subject to a judgment.
Paragraph 12 – Consideration. Because no money
changed hands, the attorneys in this matter felt it
necessary for the parties to agree they received
adequate consideration. The provision probably is
more important with respect to two of the parties who
had no current individual claims.
They simply
expected to be inheriting a certain amount of property
in the future.
Paragraph 13 – Non-Assignment. It may be
helpful to the released party to have this warranty that
the other party has not assigned his or her claims to a
third person. It is no good entering a settlement
agreement with someone who has sold his or her claim.
Paragraph 14 – No Admissions. In the context of
most disputes, no one wants to admit they were wrong.
The provision probably is more important in the
context of tort litigation where the defendants do not
want to create unintended admissions against interest
that might be used against them in the future.
Paragraph 15 – Review and Understanding.
Historically, settling parties have tried to escape the
finality of a settlement agreement by claiming they did
not understand it. This provision is simply a warranty
that they do understand the legal effects of the
agreement, and had their attorney explain the
document to them. In certain locales, like in El Paso,
many people do not speak or read the English
language.
The paragraph therefore includes a
provision regarding translation.
Paragraph 16 – Merger. This is an important
provision in any contract. Settlements are many times
the result of extenuated negotiations. This provision
dispenses with claims that there was some side
agreement in addition to the written agreement.
869791 v1
Chapter 16
Paragraph 17 – Amendment. This provision
dispenses with claimed oral amendments and is related
to the merger provision.
Paragraph 18 – Interpretation. Under common
law, agreements are construed against the drafter.
Parties can agree otherwise and this evens the playing
field if there is a dispute regarding interpretation in the
future.
Paragraph 19 – Severability. This paragraph
preserves the agreement if a portion is held
unenforceable. Hopefully, the agreement does not
contain illegal provisions. But one never can tell what
a judge might say in the future.
Paragraph 25 – Enforcement. Under the common
law, if a party breaches an agreement, there is typically
no opportunity to cure before a suit can be brought.
This provision builds in the opportunity to cure.
Paragraph 26 – Arbitration. Arbitration may or
may not be appropriate in a particular case. In the
author’s opinion, arbitration clauses tend to favor the
potential defendant because of the higher filing fees
and arbitrator fees associated with arbitration as
compared to a civil suit.
F.
Exchange Agreements
Exchange agreements are agreements by which
the parties agree to accept one asset in exchange for his
or her interest in another asset. They are common in
two major estate distribution scenarios.
The first
common scenario is the distribution of the deceased
spouse’s former one-half community property to a
Bypass Trust. The second is the distribution of a
parent’s assets among the children or other descendants
on an equal basis. In both scenarios, a pro rata
distribution might not be appropriate or desired. For
example, the surviving spouse may need to rely on
income from an investment partnership for future
support, but there is little chance of appreciation in the
value of the partnership interest. In the meantime,
other assets with a better chance of appreciation may
exist to fund a Bypass Trust. In this situation, it might
be best to ensure that 100% of the partnership interest
is owned by the spouse, rather than split the interest
between the spouse and the bypass trust. The goal is
accomplished through an exchange or partition
agreement.
Note that an exchange agreement can and
probably does implicate capital gains tax consequences
if there has been a change in value since the date of
death.
A sample exchange agreement is attached as
Exhibit G. It is designed for an exchange between a
surviving spouse and the Trustee of a Bypass Trust, but
can easily be adapted for other specific transactions.
11
G. Closing Memoranda
Closing memoranda are intended to be the
compilation of all the necessary information to
document all aspects of an estate or trust in a succinct
and orderly manner. The memorandum should contain
the necessary information to answer any distribution or
funding question that might arise in the future. One of
the more important tasks they perform is to
memorialize the rationale for important decisions made
during administration. They also may include many of
the documents discussed above, if relevant.
Closing memoranda typically are prepared when
estate taxes are implicated. Taxes may be implicated
even if a 706 is not filed. For example, the combined
estate of a husband and wife may exceed the applicable
exemption amount, but the deceased spouse does not
have enough to require a 706. If the deceased spouse’s
assets are transferred to a Bypass Trust, the IRS may
question the funding of that Bypass Trust when it
examines the 706 filed on behalf of the surviving
spouse. Without a closing memorandum regarding the
first estate, there will be little information to support
the decisions made for funding the Bypass Trust
several years before.
Attached as Exhibits H, I, J and K are four
different examples of Closing Memoranda.
Exhibit H was prepared in an estate where no 706
was required, but a Bypass Trust was funded through a
testamentary trust.
Exhibit H also included a
disclaimer.
Exhibit I also did not involve a 706. It differs
from Exhibit H in that it arises out of an estate that had
no probate property.
The family successfully
transferred all of their property to their living trust
before the first death.
A 706 was filed in connection with Exhibit J. It
involved a disclaimer and the funding of a Bypass
Trust and Marital Trust, utilizing a fairly representative
method of funding the pecuniary gift.
Exhibit K also involved a 706. Here, the
executors established a QDOT trust for the surviving
spouse after the decedent’s death because she was not a
U.S. citizen.
Each of the Exhibits H through K have the same
basic framework and should be adaptable for virtually
any estate for which a closing memorandum is
advisable.
Chapter 16
the administrations were concluded. The author hopes
that these forms, and the comments provided in this
outline, will be of use to other attorneys who are
advising their clients on how to memorialize their
actions taken to close and distribute decedent’s estates.
VI. CONCLUSION
There are probably almost as many different ways
to document the distribution and closure of a
decedent’s estate as there are estate administration fact
situations. This outline presents a selection of forms
used by one firm of attorneys to document how their
clients followed the wills and other directions of the
decedent, and clarify and preserve for the record how
869791 v1
12
Chapter 16
Exhibit A – Sample Draft Schedules of Gross Estate
Initial Draft
A Estate - Draft Gross Estate Valuation - As of August 21, 2007
Schedule
Date of
W's 1/2
Death Value Share of
Asset
Schedule A (Real Estate)
Residence
Ruidoso Cabin - ROS
_________ Commercial
Schedule B (Stocks & Bonds)
Fidelity Acct No.
Fidelity Acct No. - ROS
Fidelity Acct No.
Fidelity Acct No. - IRA (H)
Fidelity Acct No. - IRA (W)
Janus Acct No. - ROS
Am. Century Acct No. - ROS
Dreyfus Acct No. - ROS
US Global Acct No.
NE Utilities
A Enterprises
A Printing Co.
Schedule C (cash, etc.)
Bank of Am Acct No. "OR"
GECU Acct No. "OR"
GECU Acct No. "OR"
GMAC Demand Notes Acct No.
Schedule D (Life Ins.)
Ins. Co. of California Acct No.
Policy for H w/ cash value?
Schedule J (Expenses)
Food Costs
Funeral Home
Minister
Schedule K (Debts)
Mortgage on Commercial Prop.
Margin Acct - Fidelity Acct No.
Total
Maximum value of Credit Shelter Trust
869791 v1
Availablilty Outright to
for Funding Mr. A
Credit
Shelter Trust
Availability Need
Need
for
Disclaimer Disclaimer
Funding
for Will
for ROS
QTIP Trust
338,000
117,500
271,700
169,000
58,750
135,850
169,000
58,750
135,850
x
x
x
620,527
295,363
22,356
65,301
395,343
531,153
35,330
4,942
982
30,601
10,016
2,756
414
5,701
1,100,000
300,000
310,264
147,682
11,178
32,651
197,672
265,577
17,665
2,471
491
15,301
5,008
1,378
207
2,851
550,000
150,000
310,264
147,682
11,178
32,651
x
x
x
x
x
x
Need to exclude from disclaimer
Need double disclaimer
x
x
5,431
8,060
70,985
3,099
2,716
4,030
35,493
1,550
35,493
1,550
x
x
50,000
25,000
25,000
x
(609)
(10,556)
(300)
(305)
(5,278)
(150)
(144,470)
(72,235)
(60,433)
(30,217)
4,069,192 2,034,596
197,672
265,577
17,665
x
:
Based solely on tax
appraisal. Need appraisal
2,471
491
15,301
5,008
x
x
x
x
1,378
207
2,851
550,000
150,000
x
x
x
x
:
Based on client estimate;
Need Formal Appraisal
2,716
4,030
x
:
Based on client estimate;
Need Formal Appraisal
:
Beneficiary is the
testamentary trust
1,934,023
1,717,655
A-1
208,757
0
Chapter 16
Exhibit A (continued) – Sample Draft Schedule of Gross Estate
Later Draft
A Estate - Draft Gross Estate Valuation - As of March 21, 2008
Schedule
Date of
W's 1/2
Death Value Share of
Asset
Schedule A (Real Estate)
Residence
Ruidoso Cabin - ROS
__________ Commercial
Schedule B (Stocks & Bonds)
Fidelity Acct No.
Fidelity Acct No.
Fidelity Acct No. - IRA (H)
Fidelity Acct No. - IRA (W )
Dreyfus Acct No. - ROS
US Global Acct No.
NE Utilities
A Enterprises
A Printing Co.
Schedule C (cash, etc.)
Bank of Am Acct No. "OR"
GECU Acct No. "OR"
GECU Acct No. "OR"
GMAC Demand Notes Acct No.
Loan to A Printing Co.
Accrued Interest on above loan
Schedule D (Life Ins.)
TransAmerica Acct No. (face value)
$50,000 - on W's life
Schedule F (Miscellaneous)
TransAmerica Acct No. - (face value)
$50,000 - on H's life
Veteran's Admin policy for H (cash
value) ___________
Disney Vacation Time Share
2001 Acura MDX
Personal Effects/HHG & Furnishings
Schedule J (Administration Expenses)
Food Costs
Funeral Home
Minister
Attorney's fees through 12/31/07
Appraisal Fees
Accounting Fees
Schedule K (Debts)
Mortgage on Commercial Property
Margin Acct - Fidelity Acct No.
Loan to Shareholders from A Enterprises
Loan to Shareholders from A Printing
Total
Maximum value of Credit Shelter Trust
869791 v1
Availablilty
Outright to
for Funding Mr. A
Credit
Shelter Trust
Availability Need
Need
for
Disclaimer Disclaimer
Funding
for Will
for ROS
QTIP Trust
338,000
117,500
325,000
169,000
58,750
162,500
169,000
58,750
162,500
x
x
x
620,527
295,363
22,356
65,301
395,343
531,153
35,330
4,942
982
30,601
10,016
2,756
414
5,701
788,000
0
310,264
147,682
11,178
32,651
197,672
265,577
17,665
2,471
491
15,301
5,008
1,378
207
2,851
322,000
0
310,264
147,682
11,178
32,651
x
x
x
x
x
x
Need to exclude from disclaimer
Cannot effect qualified disclaimer
x
x
5,431
8,060
70,985
3,099
291,317
78,840
2,716
4,030
35,493
1,550
145,659
39,420
197,672
265,577
17,665
x
2,471
491
15,301
5,008
x
x
:
Discounted Value per
qualified appraisal
Per Qualified Appraisal client had not recognized
significant debt of
company.
:
Beneficiary is the Credit
Shelter Trust
x
x
1,378
207
2,851
322,000
0
x
x
x
x
2,716
4,030
35,493
1,550
145,659
39,420
x
x
50,000
25,000
624
312
312
22,000
6,000
13,200
45,000
11,000
3,000
6,600
22,500
11,000
3,000
6,600
22,500
x
25,000
(10,556)
(300)
(7,542)
(6,680)
(10,556)
(300)
(7,542)
(6,680)
(144,470)
(72,235)
(60,433)
(30,217)
(140,670)
(70,335)
(15,923)
(7,962)
3,822,345 1,814,095
(72,235)
(30,217)
(70,335)
(7,962)
1,296,348
1,502,174
A-2
Need to disclaim benefical interest
:
Estimate off Mr. A's
memory - he'll get exact
number
:
Purchased early 90's $12,000 for 50 years.
Transferrable. This is an
estimate.
:Based on April 2007
NADA Blue Book. We
need to know condition,
mileage, and whether
Nav, Nav Touring,
:The number is only an
estimate - 10% of the
value of the Ruidoso
cabin and the residence
517,746
0
Chapter 16
Exhibit B – Sample Disclaimer
IN THE PROBATE COURT NUMBER ______
EL PASO COUNTY, TEXAS
IN THE MATTER OF THE ESTATE
§
§
§
§
§
OF
________________, Deceased.
No. _____________
PARTIAL DISCLAIMER BY ______________________
Pursuant to 26 U.S.C. § 2518 and TEX. PROB. CODE § 37A, ______________ files this Partial
Disclaimer.
1.
Disclaimant. The person disclaiming is __________________. (“Disclaimant”), who is
the surviving spouse of ____________________ (“Decedent”).
2.
Decedent. The Decedent died on __________________.
The Decedent’s estate is the
subject of the above referenced cause.
3.
Disclaimer of Interests under Will. Subject to the remaining sentences in this paragraph,
Disclaimant disclaims all of his interests in a distribution of property pursuant to Paragraph ___ of
Decedent’s Will. The disclaimer does not include, however, Disclaimant’s interest in a distribution of the
following described property: _______________________________. This is a partial disclaimer limited
only to the interests and benefits specifically described, and excludes any interest to which Disclaimant
may be entitled under other provisions of Decedent’s Will, including but not limited to Paragraph ___ of
the Will, or to which the Disclaimant may be entitled from Decedent’s estate.
4.
Disclaimer of Rights as Surviving Joint Tenant with Rights of Survivorship.
Disclaimant also disclaims all of his rights as the surviving joint tenant with rights of survivorship with
respect to the following specifically described property. This is a partial disclaimer limited only to the
survivorship interest specifically described, and excludes any beneficial interest which the Disclaimant
may be entitled to receive under Paragraph ___ of Decedent’s Will or from Decedent’s estate.
 Decedent’s undivided one-half interest in the real property located in Lincoln County, New
Mexico, including improvements, legally described as:
869791 v1
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Chapter 16
Lot 3, Block A, __________ Subdivision, Lincoln County, New Mexico, as shown
by the official plat filed in the Office of the County Clerk of Lincoln County, New
Mexico on __________;
 Decedent’s undivided one-half interest in the Fidelity Investments Account Number
__________, held in the names of _______________ and _______________.
5.
Disclaimer of Life Insurance Proceeds. Disclaimant also disclaims all of his interest in
Decedent’s former community property one-half interest in the proceeds of the following life insurance
policy. This is a partial disclaimer limited only to the interest specifically described, and excludes any
beneficial interest which the Disclaimant may be entitled to receive under Paragraph ___ of Decedent’s
Will or from Decedent’s estate.
 Decedent’s undivided one-half interest in the __________ Life Insurance Company policy
number __________, insuring the life of Decedent.
6.
Disclaimer of Retirement Benefits. Disclaimant also disclaims all of his interest in
Decedent’s former community property one-half interest in the proceeds of the following life retirement
accounts. This is a partial disclaimer limited only to the interest specifically described, and excludes any
beneficial interest which the Disclaimant may be entitled to receive under Paragraph ___ of Decedent’s
Will or from Decedent’s estate.
 Decedent’s undivided one-half interest in the __________ account number __________, held in
the name of Decedent.
7.
Nonacceptance of Benefits. Disclaimant has not accepted any interest in or benefits from
the disclaimed property interests and has not taken possession of or exercised dominion or control over
any of the disclaimed property interests. Further, Disclaimant has and will not receive any consideration
of any kind for making this Disclaimer.
[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]
869791 v1
B-2
8.
Chapter 16
Irrevocable and Unqualified. This Disclaimer is irrevocable and unqualified.
EXECUTED on this ________ day of ________________, 2008.
___________________________________
______________________, Individually
THE STATE OF TEXAS
COUNTY OF EL PASO
§
§
§
This instrument was acknowledged before me on the _______ day of ________________, 2008,
by ___________________, individually.
________________________________________
NOTARY PUBLIC in and for the State of Texas
ACKNOWLEDGMENT OF DELIVERY
The undersigned, ___________________, acting in his capacity as the duly serving and
recognized Independent Executor of the Estate of _______________________, Deceased, in the abovereferenced probate proceeding, acknowledges receipt of this Partial Disclaimer on this ______ day of
________________, 2008.
__________________________________
___________________________
Independent Executor of the Estate of
_____________________________, Deceased
869791 v1
B-3
Chapter 16
Exhibit C – Sample Receipt and Release
§
§
§
§
§
OF
________________, Deceased.
No. _____________
RECEIPT AND RELEASE
I, ____________________, Trustee of the _____________ Trust, a beneficiary of the Estate of
_____________ (“Estate”), acknowledge receipt of all distributions from the Estate to which I may
be entitled from the Independent Executor, __________________, (“Executor”). The property I
have received is described as follows:



I also release the Executor from any further liability with respect to the Estate and waive all
future rights to contest the executor’s distribution of the Estate and the manner in which the Executor
carried out his or her duties.
Dated the __________ day of ____________________, 2008.
____________________________________
_____________________, Trustee of the
___________________ Trust
869791 v1
C-1
Chapter 16
Exhibit D – Sample Assignment
BILL OF SALE AND ASSIGNMENT
Effective as of the __ day of __________, 2008, __________________ (“Assignor”), acting in
his capacity as Independent Executor of the Will and Estate of _____________________, Deceased, and
___________________ (“Assignee”), acting in his capacity as the Trustee of ___________________
TRUST (“_____________ Trust”) established under the terms of the Last Will and Testament of
________________, Deceased, enter this Bill of Sale and Assignment (“Assignment") on the following
terms and conditions.
RECITALS:
a.
________________ (“Decedent”) died on ______________, leaving a Last Will and
Testament dated _________________ (“Will”), which was admitted to probate by Order dated
__________, 2008 in the El Paso Probate Court Number ____, El Paso County, Texas, Cause Number
_______________; and
b.
In satisfaction of the Will’s terms, Assignor desires to transfer the assets of Decedent’s
estate to Assignee, which are described on the attached Exhibit A ("Transferred Assets").
For and in consideration of the premises herein stated, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee
agree as follows:
1.
Transfer and Assignment. Assignor hereby grants, sells, transfers and assigns to the
Assignee, his successors and assigns, the Transferred Assets and/or the proceeds from the sale thereof (if
any).
2.
Documentation. Assignor shall execute and deliver, or cause to be executed and
delivered, any and all agreements, instruments, papers, deeds, and other documents as may be reasonably
required to complete the transfer of title of the Transferred Assets to Assignee.
3.
Successors and Assigns. This Assignment shall be binding upon, inure to the benefit of
and be enforceable by the parties hereto and their respective heirs, executors, administrators, successors
and assigns.
3.
Construction. In the event that any provision of this Assignment shall be held to be
invalid, illegal, or unenforceable, the validity of the other provisions of this Assignment shall be in no
way affected thereby. The Assignment shall be interpreted under and governed by the laws of the State of
Texas.
Executed as of the date indicated below, to be effective _____________________, 2008.
The Estate of _____________, Deceased
By: ___________________________
_____________________
Its: Independent Executor
Dated ________________, 2008
869791 v1
D-1
Chapter 16
The _________________________ Trust
By: __________________________
___________________
Its: Trustee
Dated ________________, 2008
869791 v1
D-2
Chapter 16
Exhibit A to Bill of Sale and Assignment
ITEM
ASSET
REFERENCE
AMOUNT
1.
Former community property interest in 100% of
outstanding shares of ______________, Inc.
2.
Former community property interest in various
securities held with Fidelity Investments and Account No. _______ $ 310,264.00
proceeds therefrom (if any)
3.
Former community property interest in 223.447
shares of Janus Fund and proceeds therefrom (if any) Account No. _______ $
4.
5.
6.
N/A
$ 322,000.00
shares of American Century Mutual Funds Select
Account No. _______ $
Investment and proceeds therefrom (if any)
1,055.00
15,301.00
shares of American Century Mutual funds Growth Account No. _______ $
Fund Investment and proceeds therefrom (if any)
5,008.00
Former community property interest in 26.982 shares
of US Global Investors Gold and Precious Metal Account No. _______ $
Fund and proceeds therefrom (if any)
207.00
7.
Former community property interest in 176 shares of
CUSIP 664397106
Northeast Utilities
$
2,851.00
8.
92.376% of the former community property interest
in the Government Employees Credit Union Account No. ______
checking account and proceeds therefrom (if any)
$
32,787.00
Former ½ undivided community property interest in
2001 Acura MDX and proceeds therefrom (if any)
$
6,600.00
9.
869791 v1
D-3
N/A
Chapter 16
Exhibit E – Sample Section 151 Closing Affidavit
OF
________________, Deceased.
§
§
§
§
§
No. _____________
CLOSING AFFIDAVIT
Pursuant to TEX. PROB. CODE § 151(a), ______________, Independent Executor of the Estate of _________,
Deceased (“Estate”), files this Closing Affidavit and would show:
1.
Initial Property of the Estate. The Executor administered the property listed in the Inventory, which
was approved by the Court on _____________, 2008. The Executor also administered the following listed property
of the Estate, which includes receipts for rents, interest and dividends:
2.

__________________;

__________________; and

__________________.
Debts. The Executor has paid the following listed debts to the named creditors. No debts are still
owing.
3.
5.

__________________;

__________________; and

__________________.
Property Remaining. The following listed property remained after payment of the debts listed above.

__________________;

__________________; and

__________________.
Distribution. The Executor distributed the property remaining in the estate in accordance with the
Will as follows. Receipts from or other proof of delivery of the remaining property to each distributee are attached.
869791 v1

__________________ (include addresses);

__________________; and
E-1

6.
Chapter 16
__________________.
Termination of Administration.
Pursuant to TEX. PROB. CODE § 151(b), the independent
administration of this Estate is terminated.
VERIFICATION
THE STATE OF _____________
COUNTY OF ___________
§
§
§
My name is ___________________, and I am the Executor of the Estate of _______________,
Deceased. I have read the Closing Affidavit to which this verification is attached and state that I have
personal knowledge of all the facts contained therein and that they are true and correct.
_______________________________________________
_____________________
SUBSCRIBED AND SWORN TO BEFORE ME this ______ day of ________________, 2008.
NOTARY PUBLIC, State of ___________
My commission expires:
___________________
869791 v1
E-2
Chapter 16
Exhibit F – Sample Family Settlement Agreement
FAMILY SETTLEMENT AGREEMENT
This Family Settlement Agreement (“Agreement”) is made as of the dates written below by and among the
Parties, as defined below.
I. DEFINITIONS
A. The terms “Party” or “Parties” mean the following persons as the context may require:
 A, individually;
 B, individually;
 C, individually;
 D, individually; and
 E, individually and in his capacity as Executor of the Estate of F, Deceased, and in his capacity as
Executor of the Estate of G, Deceased.
B. The term “Acres” means the real property and all associated improvements legally described as
___________________, an addition to the City of El Paso, El Paso County, Texas, according to the map or
plat thereof recorded in __________________, of the Plat Records of El Paso County, Texas, subject to
Excepted Items.
C. The term “Garden” means the real property and all associated improvements legally described as a portion of
__________________________, an addition to the City of El Paso, El Paso County, Texas, according to the
map or plat thereof recorded in ________________, of the Plat Records of El Paso County, Texas, subject to
Excepted Items.
D. The term “Grant” means the real property and all associated improvements legally described as
____________________, in the City of El Paso, El Paso County, Texas, subject to Excepted Items, and all
the proceeds of the sale of such property to XYZ, LLC on or about _________, 2006.
E. The term “Excepted Items” means all reservations, restrictions, covenants, conditions, easements, and
encroachments, whether of record or not. The term also includes any water rights that may have been
transferred to third parties, whether of record or not. Further, the term includes all standby fees, taxes and
assessments by any taxing authority for the year 2007 and subsequent years, and subsequent taxes and
assessments by any taxing authority for prior years due to change in land usage or ownership.
F. The term “Lawsuit” means the civil action styled ______________ as Executor of the Estate of
_________________, Plaintiff, v. ______________________, Defendants, filed in the County Court at Law
Number Five of El Paso County, Texas, Cause Number ____________.
G. The term “Reimbursement Claims” means any and all causes of action that might be asserted by any Party
for reimbursement of or damages related to money paid, services rendered, improvements made, or other
contributions related in any way to Acres, Garden, Grant and the Lawsuit, including but not limited to taxes,
expenses and settlements.
H. The term “Environmental Requirement" means any statute, common law rule, rule, regulation, order,
authorization (including any permit) or policy of any governmental authority relating to the environment,
pollution, natural resources, health or safety, including the federal Clean Air Act, Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), Water Pollution Control
Act, Resource Conservation and Recovery Act of 1976 ("RCRA"), Occupational Safety and Health Act, and
the Texas Water Code and Texas Health & Safety Code, as each of such statutes and codes has been
amended to date and may be amended from time to time.
869791 v1
F-1
Chapter 16
I. The term "Hazardous Material" means any material, waste or substance that is regulated, considered or
identified as hazardous or toxic or as a pollutant or contaminant under any Environmental Requirement,
including any "hazardous substance" under CERCLA, "solid waste" or "hazardous waste" under RCRA,
petroleum, petroleum product, asbestos, polychlorinated biphenyls and radioactive materials.
J. The term "Environmental Claim" means any governmental or private claim or action pursuant to any
Environmental Requirement instituted or threatened or relating to Acres, Garden and/or Grant, including any
investigative, enforcement, cleanup, removal, containment or remedial action.
K. The term “Released Claims” means all claims, causes of action, and liabilities of any kind whatsoever,
known or unknown, fixed or contingent, that any Party may have or may have had against another Party as of
the date of this Agreement, including but not limited to those related in any way to Acres, Garden, Grant, the
Lawsuit, the Estate of F, Deceased, and the Estate of G, Deceased, and all other matters that could be alleged
in any suit, charge, or claim. The term “Released Claims” also means all claims, causes of action, and
liabilities of any kind whatsoever, fixed or contingent, that might arise in the future, that any Party may have
against another Party after the date of this Agreement related in any way to the ownership of Acres, Garden
and Grant. The term “Released Claims” specifically includes, but is not limited to, the Reimbursement
Claims and all claims under any state or federal statute, regulation or common law for loss of inheritance,
trespass, waste, premises liability, attractive nuisance, conversion, fraud, negligent misrepresentation,
negligence, adverse possession, breach of the implied warranty of habitability, breach of the implied
warranty of suitability, breach of contract, quantum meruit, promissory estoppel, slander of title, private or
public nuisance, abnormally dangerous conditions, and Environmental Claims.
II. RECITALS
A. A and C are the only surviving children of G and H (“Mr. and Mrs. G”). Mr. and Mrs. G had twelve
children: __________________, A, C and F. Of the twelve children, ______________ did not survive both
Mr. and Mrs. G and did not leave any descendants.
B. B is the son of A. D is the surviving spouse of F. E is the surviving son of F.
C. During their joint lifetimes, Mr. and Mrs. G acquired Acres. After Mr. G’s death, Mrs. G owned one
hundred percent of Acres. Mrs. G later acquired Garden.
D. During his lifetime, F acquired Grant. Some real property records of El Paso County, Texas suggest that I,
the son of Mr. and Mrs. G, had an interest in Grant.
E. The Real Property Records of El Paso County, Texas reveal a series of transfers among Mrs. G and Mr. and
Mrs. G’s surviving children and/or their descendants or heirs relating to Acres. The transfers have occurred
through releases, deeds, intestacy (as evidenced by Affidavits of Heirship), and Probate. The Parties agree
that the following persons currently have the following undivided interests in Acres:

C
— 297/480

A
—

D
--
99/480
84/480
F. The Real Property Records of El Paso County, Texas also reveal a series of transfers among Mrs. G and Mr.
and Mrs. G’s surviving children and/or their descendants or heirs relating to Garden. The transfers have
occurred through releases, deeds, intestacy (as evidenced by Affidavits of Heirship), and Probate. The
Parties agree that the following persons currently have the following undivided interests in Garden as
indicated by the Lot number:
869791 v1

A portion of Lot 3 and Lot 4 — C — 100%

Lot 5 — C — 3/4
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A — 1/4

Lots 6-11 — C — 3/5
A — 1/5
D — 1/5

Lot 12 — D — 100%

Lots 13-14 — C
A
D

Lot 15 — A — 100%
— 3/5
— 1/5
— 1/5
G. Since about 1960, A and B have resided in a home located on Acres. Also, C has resided in another home
located on Acres her entire life.
H. During his lifetime, F paid substantial sums of money to maintain and to satisfy taxes due on Acres, Garden
and Grant. F also provided other services related to the two properties. The claims for reimbursement, if
any, now belong to the Estate of F.
I. On ____________, 2006, E, as Executor of the Estate of F, and D sold the Grant to XYZ, LLC by Warranty
Deed with Vendor’s Lien, filed in the Real Property Records of El Paso County, Texas, Document Number
__________________ (“Warranty Deed”). The proceeds from the sale were distributed according to the
Will of F.
J. Certain disagreements have arisen among the Parties relating to the ownership of Acres, Garden, Grant and
relating to liability for the Reimbursement Claims.
K. To avoid the uncertainty and expense of prolonged litigation, appeals, attorneys’ fees, costs and risks, the
purpose of this Agreement is to settle and compromise all Released Claims, whether asserted or not,
including but not limited to those related to (1) Acres; (2) Garden; (3) Grant; (4) the Reimbursement Claims;
(5) the Estate of F, Deceased; and (6) the Estate of G, Deceased.
III. THE AGREEMENT
The Parties hereby agree and warrant as follows:
1.
Acres. D agrees to transfer all of her interests in Acres to A and C, equally. To document the transfer, D
shall execute the Special Warranty Deed attached hereto as Exhibit ____ and deliver it contemporaneously
with executing this Agreement to counsel for A and C for recording. Further, D agrees to pay C a sum equal
to no more than one-half of the assessed property taxes on Acres for each year beginning with the year 2007
and ending the earlier of either (a) the year of C’s death, or (b) the year 2010, subject also to a maximum
cumulative payment of $7,000.00. Such payments will be by check made payable to C and delivered to her
on or before January 15 of the year following the year for which such taxes are assessed.
2.
Garden. A and C agree to transfer all of their respective interests in Garden to D. To document the transfer,
A and C shall execute the Special Warranty Deed attached hereto as Exhibit __ and deliver it
contemporaneously with executing this Agreement to counsel for D for recording.
3.
Grant. A and C agree to transfer all of their respective interests, if any, in Grant and the proceeds from the
sale of the property to D. To document the transfer, A and C shall execute the Quitclaim Deed attached
hereto as Exhibit __ and deliver it contemporaneously with executing this Agreement to counsel for D. A, B
and C also agree to join D and E, in his capacity as Executor of the Estate of F, Deceased, in warranting and
forever defending the conveyance of Grant to XYZ, LLC and its heirs, successors and assigns against every
person whomsoever lawfully claiming or to claim the same of any part of Grant, except as to the
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Reservations from Conveyance and the Exceptions to Conveyance and Warranty as provided in the Warranty
Deed.
4.
Reimbursement Claims. E, in his capacity as the Executor of the Estate of F, Deceased, and D agree to
release the Reimbursement Claims.
5.
Contract Concerning Succession. C hereby represents and states that the current version of her last will
and testament is dated September 15, 2005 (the “Will”). Article III, Paragraph A of said Will contains a
residuary bequest of her entire estate in equal shares to E and B. C hereby agrees not to revoke or otherwise
modify Article III, Paragraph A of said Will and this contractual agreement is made in consideration of the
other provisions of this Agreement. The Parties to this Agreement agree that the provisions of this paragraph
are to ensure that the residuary devise in Article III, Paragraph A of C’s Will is considered to be a contract
concerning succession, as set forth in Section 59A of the Texas Probate Code.
6.
Disclaimer. E, individually, agrees to disclaim, pursuant to TEX. PROB. CODE § 37A, all interests to which
he may be entitled as a result of C’s death, whether by Will, intestacy or otherwise. To document the
disclaimer, and upon written request and notice of C’s death, E shall execute a Disclaimer substantially in the
form of Exhibit J and deliver the Disclaimer to the Party requesting the Disclaimer on or before the
fourteenth day after E receives the request and notice.
7.
Mutual Release. The Parties unconditionally release, acquit, and forever discharge every other Party, and
their respective heirs, personal representatives, successors, assigns, employees, agents, and attorneys
(“Released Party” or “Released Parties”) from the Released Claims. Each Party intends and agrees not to
seek any additional money or recovery from any of those released hereby and to release all such persons or
entities named herein, as well as those persons who are described in this Paragraph, notwithstanding that they
are not specifically named herein. Each Party agrees to the broadest, most liberal and inclusive interpretation
of the Agreement to effectuate his or her intent as stated herein. The Parties further agree that they have
accepted the consideration specified herein as a complete compromise of matters involving disputed issues of
law and fact. The Parties assume the risk that the facts or law may be other than any one of the Parties may
believe.
8.
Assignment of Released Claims. Each Party assigns all Released Claims he or she may have against any
other Party to the Party against whom the claim may exist.
9.
Forbearance. The Parties shall not institute any actions or lawsuits, or otherwise assert or attempt to assert
any claim or claims of any sort, against any other Released Party with respect to any matter relating to Acres,
Garden, Grant, the Reimbursement Claims, and the Released Claims, nor shall any Party authorize the
bringing of any such action on his or her behalf by any person, agency, organization, or other entity. Further,
each Party warrants that, as of the effective date of this Agreement, he or she is not aware of any grounds that
provide, or could provide, the basis for any such action.
10.
Indemnity and Defense. EACH PARTY AGREES TO DEFEND AND INDEMNIFY EVERY OTHER
RELEASED PARTY FROM ALL RELEASED CLAIMS THAT MAY HEREAFTER BE BROUGHT
AGAINST SUCH RELEASED PARTIES BY ANY PERSON CLAIMING BY, THROUGH OR
UNDER THE RELEASING PARTY. IN THE EVENT A PARTY, OR ANY OTHER PERSON
CLAIMING BY, THROUGH OR UNDER HIM OR HER SHALL BRING AN ACTION, CLAIM, OR
SUIT AGAINST ANY RELEASED PARTY, THEN THE PARTY SHALL PAY TO THE
RELEASED PARTY ALL DAMAGES, COSTS AND EXPENSES (INCLUDING THE PAYMENT
OF ATTORNEYS FEES, INVESTIGATION EXPENSES, AND COURT COSTS) INCURRED BY
THE RELEASED PARTY IN CONNECTION WITH SUCH ACTION, CLAIM OR SUIT.
11.
Environmental Claims. Each Party will indemnify, defend and hold harmless every other Released Party
against all liability, loss, cost or expense of any kind directly or indirectly relating to any Environmental
Claim relating to Acres, Garden, and/or Grant, any Environmental Requirement affecting such properties,
and the presence of Hazardous Materials on such properties (whether or not the placement of the Hazardous
Materials on such properties was within the control of the Released Party or any related Party).
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12.
Consideration. Each Party agrees and warrants that he or she has personally received adequate
consideration for this Agreement. Additionally, B and E, individually, specifically agree and warrant that the
avoidance of future claims and litigation relating to Acres, Garden, Grant, the Reimbursement Claims, the
Estate of F, Deceased, and the Estate of G, Deceased, together with the associated costs and risks of such
claims and litigation through the Mutual Release in Paragraph 6, the Assignment in Paragraph 7, the promise
to forbear in Paragraph 8, and the promise to indemnify and defend in Paragraphs 9 and 10 is sufficient
consideration in and of itself to induce each of them to enter this to Agreement. Further, B agrees and
warrants that the transfer of the property interests in Paragraph 1 gives B a certain expectancy interest in such
real property through intestacy or devise, which, standing alone, also would induce him to enter this
Agreement. Similarly, E agrees and warrants that the transfers of property interests in Paragraphs 2 and 3
give E a certain expectancy interest in such real property through intestacy or devise, which, standing alone,
also would induce him to enter this Agreement.
13.
Non-Assignment. Each Party warrants that he or she has not assigned or otherwise transferred to any person
any portion of the Released Claims.
14.
No Admissions. This Agreement is a compromise settlement of a disputed claim or claims, and the
furnishing of the consideration of this Agreement shall not be deemed or construed at any time or for any
purpose to be an admission of liability by any Party. Each Party expressly denies liability for any and all
Released Claims.
15.
Review and Understanding. By executing this Agreement, each Party expressly acknowledges that he or
she personally has reviewed and understood the terms of this Agreement, that to the extent necessary for
understanding this Agreement, the Agreement has been translated into the Spanish language by a person of
his or her choosing and confidence, that he or she has been advised in writing to consult with an attorney
prior to executing this Agreement, that he or she has, in fact, had an opportunity to have legal counsel of his
or her own choosing fully explain its contents and the ramifications of his or her approval of this Agreement,
that he or she has had sufficient and reasonable time to consider this Agreement, and that he or she fully
understands its contents. Further, each Party acknowledges that he or she has freely and voluntarily entered
into this Agreement.
16.
Merger. This Agreement contains all of the agreements and understandings between the Parties and
supersedes any prior negotiations or proposed or actual agreements, written or oral. Each Party
acknowledges that no other party, directly or through an agent, has made any promises, representations or
warranties whatsoever, express or implied, not contained in this Agreement, to induce him or her to execute
this Agreement.
17.
Amendment. This Agreement may be amended only by a subsequent writing signed by the Parties.
18.
Interpretation. The language of all parts of this Agreement shall in all cases be construed as a whole,
according to its fair meaning, and not strictly for or against any of the Parties.
19.
Severability. Should any provision of this Agreement be declared or be determined by any court to be
illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable; this
Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its
severance from this Agreement. Furthermore, in place of each such illegal, invalid, or unenforceable
provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to
such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
20.
Further Release. Should any court, arbitration panel, administrative agency of any federal, state or local
government unit, or any other adjudicative body determine that the provisions of this Agreement do not fully
and finally discharge all claims and causes of action that any Party may have had against the parties released
in this Agreement, then that Party agrees to reform this Agreement to release all such claims not hereby
released.
869791 v1
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Chapter 16
21.
Parties Bound. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their
agents, attorneys, employees, legal and personal representatives, heirs, successors and assigns.
22.
Choice of Law. This Agreement shall be construed under and in accordance with the laws of the State of
Texas.
23.
Attorney’s Fees. Each party shall be responsible for his or her own attorney’s fees and costs related to the
negotiation and execution of this Agreement. However, in the event that one of the Parties hereto breaches
any of the terms of this Agreement whereby the Party not in default employs attorneys to protect or enforce
such Party’s rights hereunder and prevails, then the defaulting Party (or Parties) agrees to pay the reasonable
attorney’s fees and expenses so incurred by such other Party (or Parties). Conversely, should an action be
brought based on an alleged default, and should the defendant/alleged defaulting Party prevail in that suit,
establishing that there was no default, then the Party bringing the action agrees to pay the defendants’
reasonable expenses and attorney’s fees incurred in defending said action.
24.
Durability of Rights and Obligations. The terms of this Agreement and the rights and obligations of the
Parties shall survive the execution and delivery of the instruments contemplated hereby and described herein
and shall not be merged therein.
25.
Enforcement. If any Party to this Agreement fails to perform his or her obligations hereunder, the Party
claiming default may make written demand for performance upon the defaulting Party. If the defaulting
Party fails to comply with such written demand within ten (10) days after receipt thereof, the notifying party
will have the option to waive the default, or enforce specific performance of this Agreement by pursuing the
alternative dispute resolution remedies under this Agreement against the defaulting Party.
26.
Alternative Dispute Resolution. In the unlikely event that a dispute occurs related in any way to the
operation, construction, interpretation, or enforcement of this Agreement, the Parties hereby agree to submit
the dispute to an arbitrator so that the matter may be arbitrated in lieu of resolving the dispute in a court of
law or equity. The Parties shall choose an arbitrator from the American Arbitration Association pursuant to
the following process:
a.
The Parties shall request from the American Arbitration Association a list of eleven arbitrators. Each
Party shall have two strikes and thereby strike from the list the arbitrators they do not wish to use.
b.
The remaining arbitrator, the one that has not been stricken, will be the arbitrator to hear the matter.
c.
The Parties agree to follow the American Arbitration Association rules, guidelines and procedures.
The Arbitrator shall set the matter for hearing and shall control the procedures used in the hearing.
The Parties shall abide by the Arbitrator's decision which shall be final and binding. The Parties
agree that there shall be no right to appeal the Arbitrator's decision.
27.
Notice. All notices required or permitted under this Agreement shall be in writing and shall be deemed
delivered when actually received via certified mail, return receipt requested, addressed to the respective Party
at the address provided in Paragraph I(A), or at such other address of which the Party has sent notice to the
other Parties.
28.
Headings. The headings of this Agreement are for purposes of reference only, and shall not limit or define
the meaning of any provisions of this Agreement.
29.
Multiple Counterparts. This Agreement may be executed in multiple counterparts. To facilitate execution
of this Agreement, each Party’s signature block appears on a separate page. A copy of a Party’s signature to
this Agreement may be enforced as if it was an original.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the ______ day of July, 2007.
869791 v1
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Exhibit G – Sample Exchange Agreement
EXCHANGE AGREEMENT
Effective _________, 2008, __________________ (“Transferor”), acting in his capacity as Trustee of the
Credit Shelter Trust (“Credit Shelter Trust”) arising under the terms of the last will and testament of _____________,
Deceased, and _________________ (“Transferee”), acting in her individual capacity enter this Exchange Agreement
(“Agreement”) on the following terms and conditions.
RECITALS
1.
_______________ (“Decedent”) died on ____________, leaving a Last Will and Testament dated
_________________ (“Will”) which was admitted to probate by Order dated ________, 2008 in the District Court of
Doña Ana County, New Mexico in Cause No. ______________;
2.
At the time of the Decedent’s death, the Decedent and Transferee each owned a 50% community
property interest in the following described property (“Property”), which had a value as of ___________ as indicated:



__________________________, valued at $__________;
__________________________, valued at $__________; and
__________________________, valued at $__________.
3.
Pursuant to the terms of the Will, all of Decedent’s former 50% community property interest in the
Property passed to Transferor as Trustee of the Credit Shelter Trust;
4.
The parties desire to exchange cash belonging to the Credit Shelter Trust for the Transferee’s former
50% community property interest in the Property on an arm’s length basis (“Exchange”);
5.
The parties desire to fund the Credit Shelter Trust with both Decedent’s former 50% community
property interest in the Property and Transferee’s former 50% community property interest in the Property to avoid
splitting the ownership of the Property between the Credit Shelter Trust and Transferee; and
For these reasons, the parties agree as follows:
1.
Exchange. Transferor agrees to pay $______________ to the Transferee in exchange for the
Transferee’s interests in the Property. The Transferee agrees to convey her former 50% community property interest
in the Property to the Transferor in exchange for $_____________.
2.
Closing Date. The closing of the Exchange (“Closing”) shall be effective as of ________, 2008.
3.
Good Faith Implementation of Agreement. The parties agree to cooperate fully with each other in
performing such acts and deeds and in executing, acknowledging, and delivering any instruments or documents
required to accomplish the intent of this Agreement.
4.
Default. If either party breaches this Agreement, the other party may (i) terminate this Agreement,
thereby releasing both parties from this Agreement (ii) enforce specific performance hereof and/or (iii) seek such
other relief as may be provided by law.
5.
Attorney’s Fees. Any party to this Agreement who is the prevailing party against any other party in
any legal proceeding brought under or with relation to this Agreement or transaction shall be entitled to recover from
the non-prevailing party, in addition to all other damages to which said party may be entitled, court costs, reasonable
attorneys’ fees, and all other litigation expenses, including deposition, travel, and expert witness costs and fees.
6.
Merger. This Agreement contains the complete agreement among the parties. It cannot be
varied except by the written agreement of the parties. The parties agree that there are no oral agreements,
understandings, representations, or warranties that are not expressly set forth herein.
869791 v1
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Chapter 16
7.
Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, executors, representatives, successors and assigns.
8.
Assignment. This Agreement may not be assigned.
9.
Governing Law. This Agreement shall be construed under and in accordance with the laws of
the State of New Mexico.
10.
Legal Construction. In case any one or more of the provisions contained in this Agreement shall
for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid,
illegal, or unenforceable provision had never been contained herein. This Agreement shall be construed as a whole
and in accordance with its fair meaning and without regard to any presumption or other rule requiring construction
against the party preparing this Agreement or any part hereof.
11.
Headings and Counterparts. The headings of this Agreement are for purposes of reference only
and shall not limit or define the meaning of any provision of this Agreement. This Agreement may be executed in
any number of counterparts, each of which shall be an original but all of which shall constitute one and the same
instrument.
EXECUTED on this
hereinabove.
869791 v1
day of _____, 2008, effective as of the date of Closing set forth
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Chapter 16
Exhibit H – Sample Closing Memorandum
Funding of Bypass Trust from a Disclaimer Will
ESTATE OF ___________________, DECEASED
ESTATE DISTRIBUTION AND CLOSURE MEMORANDUM
EFFECTIVE AS OF MARCH 31, 2008
This Estate Distribution and Closure Memorandum (“Memorandum”) has two primary purposes. First, the
Memorandum documents the distribution of the assets of the Estate of __________________, Deceased (“Estate”) to
the devisees under the Last Will and Testament of ______________________ (“Will”). Second, the Memorandum
documents the distribution of non-probate assets (i.e., those assets that passed outside the Will).
I.
Family Information.
A.
Deceased. _______________ (“Mrs. A”) died in El Paso County, Texas on ________, 2007.
B.
Survivors. Mrs. A was survived by her husband, ______________ (“Mr. A”) and her two children,
_________________ and ___________________.
II. Probate of Will.
A.
Will. Mrs. A executed her Will on ________, 1985. A copy of the Will is attached at Tab A. She did
not execute any codicils. The Will was admitted to probate on ______, 2007, in the case styled In the Matter of the
Estate of ______________, Deceased, Cause Number ______________, in Probate Court Number Two of El Paso
County, Texas.
B.
Executor. The Court appointed Mr. A as Independent Executor, to serve without bond, on ______,
2007. Mr. A filed his oath on the same date.
C.
New Mexico Ancillary Probate. A New Mexico ancillary probate was needed to be filed because the
estate owned real estate in New Mexico. The Proof of Authority was filed with the Lincoln County Clerk on
_______, 2008. The Sworn Statement of Domiciliary Foreign Personal Representative to Close Ancillary Probate
was filed on _________, 2008. A copy of the Proof Authority and Sworn Statement is attached at Tab B.
III. Dispositive Terms of the Will.
A.
Gifts. If Mr. A survived Mrs. A, the Will gave all of Mrs. A’s assets to Mr. A, outright and free of
trust. (Will, ¶ 3(a).)
B.
Disclaimer. If, however, Mr. A both survived Mrs. A and filed a qualified disclaimer with respect to
any property given to him under the Will, the Will gave the disclaimed portion to Mr. A, in trust. (Will, ¶ 3(b).) The
beneficiaries of the trust include Mr. A and Mrs. A’s children, ____________ and ____________. (Id.) The Will
named Mr. A as the initial Trustee. (Id.) The testamentary trust to which the disclaimed portion is given is a classic
credit shelter trust in that the Trustee has discretion to distribute income and/or principal to the beneficiaries
according to an ascertainable standard. See 26 C.F.R. § 25.2514(c)(2) (giving examples of ascertainable standards)1.
It terminates on the death of Mr. A and is to be distributed to Mrs. A’s descendants on a per stirpes basis. (Will ¶
3(b).)
C.
Payment of Debts, Expenses and Taxes. The Will required that all debts, administration expenses
and taxes be paid out of the gift to the trust. (Will, ¶ 3(b).) While the Will does not address taxes attributable to nonprobate property, applicable federal law and TEX. PROB. CODE § 322A dictate that such taxes be apportioned to such
1
One may feel that a reference to the Regulations would be overkill. However, the Will contained an uncommon standard which
was nevertheless ascertainable under the Regulations. The intent was to establish that the question raised by the language used
had already been addressed.
869791 v1
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property.
IV. Disclaimer.
On __________, 2007, Mr. A filed a partial disclaimer in the probate proceedings related to Mrs. A’s Will,
disclaiming the following interests:

Any gift under Paragraph 3(a) of the Will, but specifically excluding Mrs. A’s former 1/2 interest in
Mr. A’s Fidelity Individual Retirement Account No. ________ and Mrs. A’s former 1/2 interest in
any life insurance policy insuring Mr. A’s life.

Mr. A’s interests as a surviving joint tenant with rights of survivorship of several properties as listed
in the Disclaimer; and

Mr. A’s right to receive his former 1/2 community property interest in the life insurance policy
insuring Mrs. A’s life. (This disclaimer was necessary to avoid adverse estate tax consequences
because the beneficiary designation on the policy named the testamentary trust as the beneficiary.
A copy of the Disclaimer is attached at Tab C.
V. Form 706 Estate Tax Return and Date of Death Values.
Mr. A, as Executor, timely filed a Form 4768 Application for Extension of Time to File a Return on
January 8, 2008, extending the time to file a Form 706 United States Estate (and Generation-Skipping Transfer) Tax
Return (“Return”) to July 18, 2008, because the appraisers were unable to complete the appraisals of the commercial
land and of the businesses owned by Mrs. A before the deadline. After completion of the necessary appraisals, Mr. A
determined not to file a Return because Mrs. A’s gross estate for federal estate tax purposes, which totaled
$1,814,095, was substantially less than the applicable exemption amount of $2,000,000. Instead, Mr. A informed the
IRS by letter that no Return would be filed on March 12, 2008. A copy of the notice is attached at Tab D.
A.
Probate Assets. Mr. A filed an Inventory with the Probate Court on __________, 2008. A copy of
the Inventory and approved Order are attached at Tab E. The Probate Assets reported on the Inventory include the
following:
CHART NO. 1 – PROBATE ASSETS REPORTED ON INVENTORY
PROPERTY DESCRIPTION
____________ Residence
Ruidoso Cabin
___________ Commercial Property
50% Shares A Enterprises, Inc.
50% Shares A Printing, Inc.
Fidelity Account No. ______, consisting of various
securities and cash
869791 v1
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$169,000.00
$58,750.00
$162,500.00
$322,000.00
$0.00
$310,264.00
securities and cash
$147,682.00
securities and cash
$11,178.00
Fidelity Account No. _______, consisting of various
securities and cash
$32,651.00
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Chapter 16
Janus Account No. ________, consisting of various
securities and cash
$17,665.00
Am. Century Account No. _______, consisting of
various securities and cash
$15,301.00
Am. Century Account No. ________, consisting of
$5,008.00
US Global Account No. _________, consisting of
____ Shares NE Utilities
GECU Account No. ______
GMAC Demand Notes Account No. ______
Loan to A Printing Co.
Accrued Interest on above loan
1/2 Undivided Interest in 2001 Acura MDX
1/2 Undivided Interest in household goods & personal
effects
TOTAL
$207.00
$2,851.00
$35,493.00
$1,550.00
$145,659.00
$39,420.00
$6,600.00
$22,500.00
$1,506,279.00
All of the probate assets reported on the Inventory were the community property of Mr. and Mr. A. The
Inventory reported the date of death value for the entire community interest in each asset. The Estate’s interest in
each asset, however, was one-half the value reported on the Inventory. The values reported in Chart No. 1, above,
reflect only the Estate’s interest in the properties.
B.
Non-Probate Assets. Mrs. A’s gross estate also included the following non-probate assets:
CHART NO. 2 – NON-PROBATE ASSETS
Joint Tenants with Right of Survivorship Property
Janus Account No. _________
Janus Account No. _________
Dreyfus Account No. ________
Bank of Am Account No. __________
GECU Account No. _________
Disney Vacation Time Share
SUBTOTAL JOINT TENANCY PROPERTY
Property Controlled by Beneficiary Designations - to Mr. A
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$2,471.00
$491.00
$1,378.00
$2,716.00
$4,030.00
$3,000.00
$14,086.00
Mrs. A's Fidelity IRA Account No. _________
$265,577.00
SUBTOTAL BENEFICIARY DESIGNATIONS TO MR. A
Property Controlled by Beneficiary Designations - to Credit Shelter Trust
$265,577.00
Ins. Co. of CA Policy No. __________
SUBTOTAL BENEFICIARY DESIGNATIONS TO CST
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$25,000.00
$25,000.00
Chapter 16
Other Non-Probate Properties
Mr. A's Fidelity IRA Account No. ___________
Cash Value of Ins. Co. of CA (n/k/a Transamerica Occidental Life
Ins. Co.) Policy No. _____________ on Life of Mr. A
$197,672.00
$312.00
Cash Value of Veteran's Admin Policy No. _______ on Life of Mr. A
$11,000.00
SUBTOTAL OTHER NON-PROBATE PROPERTIES
TOTAL
$208,984.00
$513,647.00
Again, the gross estate’s non-probate property was the community property of Mr. and Mr. A. The values
reported in Chart No. 2, above, reflect only the Estate’s interest in such property. The Will does not control
disposition of these assets.
C.
Debts and Expenses. Mrs. A’s estate owed debts, as indicated by the Inventory, totaling
$180,749.00. The administration expenses through March 31, 2008 totaled $29,536. Total debts and expenses
therefore totaled $210,285, as follows:
CHART NO. 3 – DEBTS AND ADMINISTRATION EXPENSES
DEBTS AND ADMINISTRATION EXPENSES
AMOUNT
Debts
Mortgage on ______ Commercial Property
A Enterprises Loan to Shareholders
A Printing Loan to Shareholders
Margin Account - Fidelity _________
SUBTOTAL OF DEBTS
$72,235.00
$70,335.00
$7,962.00
$30,217.00
$180,749.00
Administration Expenses
Funeral Expenses
$10,856.00
Accounting Fees
Attorneys' Fees (through 03/31/08, plus
estimate for future fees)
$12,000.00
Appraisal Fees
$6,680.00
SUBTOTAL OF EXPENSES
$29,536.00
TOTAL
$210,285.00
D.
Gross Estate. Assets from the probate estate and the non-probate estate totaled $1,812,018. The
following chart illustrates the addition of the two estates.
CHART NO. 4 – GROSS ESTATE
Probate Estate
Non-Probate Estate
(Debts and Expenses)
GROSS ESTATE
869791 v1
H-4
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$1,506,279.00
$513,647.00
($210,285.00)
$1,809,641.00
Chapter 16
E.
Estate Tax Exemption and Marital Deduction. In 2007, the year of Mrs. A’s death, the applicable
exemption from estate taxes was $2,000,000. Mrs. A did not make any lifetime taxable gifts. Accordingly, the
Estate had $2,000,000 of the exemption available at Mrs. A’s death. The Estate also is entitled to the marital
deduction for all assets that pass to a United States citizen spouse. Because the total value of the gross estate
($1,809,641) was less than $2,000,000, no estate taxes were owed.
VI. Transactions and Dispositions during Administration. The Executor did not dispose of or otherwise
liquidate any assets of the Estate during administration.
VII. Allocation of Estate Administration Income, Debts and Expenses.
A.
Income. The Will does not direct the allocation of income the probate estate generates during
administration. Texas law, however, supplies default provisions for the allocation of estate income when not
addressed in a Will. The net income of the probate estate is to be determined in accordance with the Texas Principal
and Income Act, TEX. PROP. CODE Ch. 116, and distributed as follows:

income from property that is the subject of a specific bequest is to be distributed to the recipient of
the specific bequest; and

the balance of the net income is to be distributed, proportionately, to “all other devisees”.
TEX. PROB. CODE §§ 378B(b), (c), (d). The Executor is granted discretion to allocate the income in a fair and
equitable manner as determined in the context of all relevant factors, including administrative convenience and
expense. Id. § 378B(h). Mr. A disclaimed all gifts to him from the probate estate. Therefore, all income necessarily
is to be allocated to the residuary gift to the Credit Shelter Trust.
Before administration of the Estate was closed, it generated $________ in income, primarily from its
interests in the bank accounts and securities accounts. Such income is therefore allocated to the residual gift and,
ultimately, to the Credit Shelter Trust.
At closing of the Estate, however, A Printing Co. and A Enterprises, Inc. had not determined the income
related to the Estate’s interests in the two companies. The Executor will allocate such income, if any, to the Credit
Shelter Trust on receipt.
B.
Debts and Expenses. The Will directs that debts, administration expenses and taxes be paid from the
gift to the Credit Shelter Trust. (Will, ¶ 3(b).) The debts and expenses of $210,285 must therefore be charged
against the gift to the Credit Shelter Trust.
VIII.
Distributions.
A.
Probate Assets. After deducting sufficient assets to account for the Estate’s debts and expenses of
$210,285 and adding back in the Estate’s income during administration of $________, the Executor distributed a
total date of death value of assets from the probate assets in accordance with the Will, paragraph 3(b) and Mr. A’s
Qualified Disclaimer to the Credit Shelter Trust as follows:
CHART NO. 5 – DISTRIBUTION OF PROBATE ASSETS TO CREDIT SHELTER TRUST
869791 v1
DOCUMENTATION
DATE OF
DEATH VALUE
$169,000.00
__________ Residence
Deed, dated
05/19/08, Ex. 1
Ruidoso Cabin
Deed, dated
05/19/08, Ex. 2
$58,750.00
______ Commercial
Property
Deed, dated
05/19/08, Ex. 3
$162,500.00
H-5
Chapter 16
DOCUMENTATION
50% Shares A Enterprises,
Assignment, dated
05/19/08, Ex. 4
50% Shares A Printing,
Assignment, dated
05/19/08, Ex. 4
$0.00
Fidelity Account No.
_________, consisting of
________, consisting of
__________, consisting of
____________, consisting of
Janus Account No.
Am Century Account No.
Assignment, dated
05/19/08, Ex. 4
$310,264.00
Assignment, dated
05/19/08, Ex. 4
$147,682.00
Assignment, dated
05/19/08, Ex. 4
$11,178.00
Assignment, dated
05/19/08, Ex. 4
$32,651.00
Assignment, dated
05/19/08, Ex. 4
$17,665.00
Assignment, dated
05/19/08, Ex. 4
$15,301.00
Am. Century Account No.
Assignment, dated
05/19/08, Ex. 4
$5,008.00
US Global Account No.
____________
Assignment, dated
05/19/08, Ex. 4
$207.00
Assignment, dated
05/19/08, Ex. 4
$2,851.00
92.376% of GECU
Account No. ____________
Assignment, dated
05/19/08, Ex. 4
$32,787.00
GMAC Demand Notes
Assignment, dated
05/19/08, Ex. 4
$1,550.00
Inc.
Inc.
NE Utilities
1/2 Undivided Interest in
2001 Acura MDX 2
DATE OF
DEATH VALUE
$322,000.00
$6,600.00
TOTAL
$1,295,994.00
The assets remaining in the Probate Estate totaling $207,908 were retained to satisfy the Estate’s debts and
expenses. Mr. A, individually, has agreed to assume the Estate’s debts and expenses in exchange for the assets
retained by the Estate. A copy of the assumption agreement is attached at Exhibit 4. The assets transferred to Mr. A,
individually, to satisfy the Estate’s debts and expenses are as follows:
2
Mr. A, as Trustee of the Credit Shelter Trust, has simultaneously distributed the trust’s interest in the Acura outright to Mr. A
for his maintenance and support.
869791 v1
H-6
Chapter 16
CHART NO. 6 – ASSETS TRANSFERRED TO MR. A, INDIVIDUALLY
7.624% of GECU Account No.
____________
1/2 undivided interest in household goods
and personal effects
DATE OF
DEATH VALUE
$2,706.00
$22,500.00
Loan to A Printing Co. and accrued interest
$185,079.00
TOTAL
$210,285.00
B.
Joint Tenants with Rights of Survivorship Accounts. The Executor was not required to take any
action with respect to the bank and securities accounts held by Mr. and Mrs. A as joint tenants with rights of
survivorship. Mr. A has contacted the financial institutions in question to retitle the accounts for which he did not
file a qualified disclaimer. Those accounts are as follows:
CHART NO. 7 – JOINT TENANT WITH RIGHTS OF SURVIVORSHIP ACCOUNTS
Janus Account No.
____________
Janus Account No.
____________
DISTRIBUTEE
Dreyfus Account No.
____________
Bank of America Account
No. ____________
GECU Account No.
____________
DATE OF DEATH
VALUE
Mr. A
$2,471.00
Mr. A
$491.00
Mr. A
$1,378.00
Mr. A
$2,716.00
Mr. A
$4,030.00
$11,086.00
TOTAL
C.
Mrs. A’s IRA. Mrs. A had one IRA at Fidelity, account no. _________. Mr. A, in his individual
capacity, has contacted Fidelity to convert the IRA into an inherited IRA for his benefit. The Estate’s interest in the
IRA was $265,577.
D.
Mr. A’s IRA. The Executor was not required to take any action with respect to Mr. A’s IRA because
Mr. A, as the owner, remained the owner after Mrs. A’s death. The IRA was included in the Estate because of Mrs.
A’s community property interest in the IRA. The Estate’s interest in the IRA was $197,672.
E.
Mrs. A’s Life Insurance Policy. Mr. A, in his capacity as Executor of the Estate and Trustee of the
Credit Shelter Trust, has contacted the carrier insuring Mrs. A’s life and transferred the death benefits to an account
for the Credit Shelter Trust. The Estate’s interest in the life insurance policy was $25,000.
F.
Mr. A’s Life Insurance Policies. The Executor was not required to take any action with respect to
Mr. A’s life insurance policies because Mr. A, as the owner, remained the owner after Mrs. A’s death. The life
insurance policies were included in the Estate because of Mrs. A’s community property interest in the policies. The
Estate’s interest in the life insurance policy was $11,312.
G.
Vacation Time Share. The executor has contacted the issuer of the contract to change it to Mr. A’s
name only. The Estate’s interest in the vacation time share was $3,000.
869791 v1
H-7
Chapter 16
IX. Reconciliation. The following chart illustrates the reconciliation of the distributions of the Estate:
CHART NO. 8 – RECONCILIATION OF ESTATE
DISTRIBUTION
To Mr. A from JTWOS Accounts
To Mr. A from IRAs
To Mr. A from his Life Insurance
To Mr. A from Time Share
SUBTOTAL TO MR. A
To Credit Shelter Trust from Probate Estate
To Credit Shelter Trust from Life Insurance
SUBTOTAL TO CREDIT SHELTER TRUST
DATE OF
DEATH VALUE
$11,086.00
$463,249.00
$11,312.00
$3,000.00
$488,647.00
$1,295,994.00
$25,000.00
$1,320,994.00
SUBTOTAL OF ALL DISTRIBUTIONS
$1,809,641.00
Gross Estate from Chart No. 4
DIFFERENCE
$1,809,641.00
$0.00
X. Credit Shelter Trust Accounting. The following chart shows the assets transferred to the Credit Shelter
Trust as of the closing date:
CHART NO. 9 –CREDIT SHELTER TRUST ACCOUNTING
½ _____________ Residence
½ Ruidoso Cabin
$58,750.00
½ _____________ Commercial
Property
$162,500.00
50% Shares A Enterprises, Inc.
$322,000.00
50% Shares A Printing, Inc.
Fidelity Account
No_____________, consisting of
_____________, consisting of various
securities and cash
securities and cash
securities and cash
Janus Account No.
securities and cash
869791 v1
DATE OF DEATH
VALUE
$169,000.00
H-8
$0.00
$310,264.00
$147,682.00
$11,178.00
$32,651.00
$17,665.00
Chapter 16
Am Century Account No.
securities and cash
Am. Century Account No.
securities and cash
US Global Account No.
_____________
DATE OF DEATH
VALUE
$15,301.00
$5,008.00
$207.00
NE Utilities
$2,851.00
92.376% of GECU Account No.
_____________
GMAC Demand Notes
$32,787.00
$1,550.00
1/2 Undivided Interest in 2001
Acura MDX
Life Insurance Proceeds
$6,600.00
$25,000.00
Income during Administration
TOTAL
_____
$1,320,994.00
XI. Allocation of Generation-Skipping Transfer Tax Exemption. In addition to the estate tax, the federal
government also imposes a tax on generation-skipping transfers (the “GSTT”). Generally speaking, the GSTT is
imposed on all transfers that skip a generation. The most common example is a transfer from a grandparent to a
grandchild. Transfers to trusts that might make a distribution that skips a generation also are subject to the GSTT.
One common example is a trust designed to provide benefits to a child for his or her life and then to provide benefits
for that child’s children (i.e., the grantor’s grandchildren).
Each person has an exemption from the GSTT equal in amount to the estate tax exemption applicable for the
year of the person’s death. Mrs. A had a potential GSTT exemption of $2,000,000. As Mrs. A did not make any
lifetime gifts subject to the GSTT, her Estate still had $2,000,000 of the exemption available at her death.
Under federal law, Mrs. A’s GSTT exemption is automatically allocated to a trust that has GSTT potential.
Because the Credit Shelter Trust has GSTT potential, a sufficient portion of the exemption is automatically allocated
to it. Further, because the allocated exemption exceeded the amount eventually distributed to the trust (after payment
of expenses), the Credit Shelter Trust has an inclusion ration of zero. This means that all distributions from the
Trust, regardless of whether they skip a generation and regardless of the amount, will be exempt from the GSTT.
Here, the Credit Shelter Trust is designed to avoid estate taxation in Mr. A’s estate. On its termination at Mr.
A’s death, the Credit Shelter Trust will be distributed outright to the children of Mr. and Mrs. A. (Will, ¶ 3(b).)
Therefore, the trust is not designed to avoid estate taxation of the estates of the children. But if one of the children
predeceased the termination of the Credit Shelter Trust, the allocation of Mrs. A’s GSTT exemption to the trust will
avoid the tax that would otherwise have been imposed. Further, and despite that the value of the principal in the trust
might grow over time, the principal will pass to Mrs. A’s children, if they survive Mr. A, estate tax free.
XII. Other Matters - Tax Identification Number. The Trustee obtained a federal tax identification number
for the Credit Shelter Trust on January 8, 2008, which is _____________. A copy of the SS-4 is attached at Tab F.
XIII.
Acceptance of Memorandum. The undersigned have read, approved and accepted this Memorandum
on the dates set forth next to their respective names, effective March 31, 2008.
869791 v1
H-9
Chapter 16
Exhibit I – Sample Closing Memorandum
Funding of Bypass Trust from Living Trust
ESTATE OF ____________, DECEASED
ESTATE AND TRUST DISTRIBUTION AND CLOSURE MEMORANDUM
EFFECTIVE AS OF SEPTEMBER 30, 2008
This Estate and Trust Distribution and Closure Memorandum (“Memorandum”) has two primary purposes.
First, the Memorandum documents the distribution of the assets of the Estate of __________, Deceased (“Estate”) to
the devisees under the Will of _____________ (“Will”). Second, the Memorandum documents the distribution of
non-probate assets (i.e., those assets that passed outside the Will), including but not limited to those assets held
pursuant to the Trust Agreement.
I.
Family Information.
A.
Deceased. __________ (“Mr. B”) died in Doña Ana County, New Mexico on _______, 2008.
B.
Survivors. Mr. B was survived by his wife, __________ (“Mrs. B”) and his two children, _________
and _____________.
A.
Will. Mr. B executed his Will on _________, 1995. A copy of the Will is attached at Tab A. He
executed a First Codicil to the Will on __________, 2002, a copy of which is attached at Tab B. Mr. B also executed
a Second Codicil to the Will on __________, 2003. The Second Codicil is attached at Tab C.
B.
Personal Representative. The Will appointed Mrs. B as Personal Representative.
C.
Probate Not Necessary. Mrs. B determined that probate of the Will was not necessary. All of Mr.
B’s assets had either (1) been transferred to the Trustee of the B Trust Agreement, dated ________, 1995, before his
death; or (2) were non-probate assets governed by beneficiary designations or deposit agreements.3 If Mrs. B later
discovers property that had not been transferred to the Trust and that requires probate of Mr. B’s Will, the deadline to
probate the Will under New Mexico law is _________, 2011.
III. Living Trust.
A.
Living Trust. Mr. B and Mrs. B, as Grantors and Trustees, executed the B Trust Agreement on
_______, 1995 (“Trust”). A copy of the Trust is attached at Tab E. They also executed the First Amendment to
Trust Agreement on ________, 1995 (“First Amendment”), a copy of which is attached at Tab F. Subsequently, Mr.
and Mrs. B executed the Second Amendment to Trust Agreement on ________, 2002 (“Second Amendment”) and
the Third Amendment to Trust Agreement on ________, 2003 (“Third Amendment”). The Second Amendment and
Third Amendment are attached at Tabs G and H, respectively.
B.
Trustee. Pursuant to Section 11.1 of the Trust, as amended by the Third Amendment, the remaining
Trustee will continue to serve as the sole Trustee if one of the Grantors dies, unless the remaining Trustee elects to
appoint a Co-Trustee. Mrs. B is the sole Trustee of the Trust pursuant to this provision. She has not appointed a CoTrustee.
C.
Payment of Debts, Expenses and Taxes. The Trust requires that all debts, administration expenses
and taxes be paid out of Mr. B’s interests in the trust property. (Trust § 4.1.)
IV. Dispositive Terms of Trust.
3
Despite that the Will gives Mrs. B all of Mr. B’s personal tangible property, the provision is ineffectual. Mr. and Mrs. B had
transferred all of their personal tangible items to the Trust on December 11, 2002, by a Bill of Sale and Assignment. A copy of
the Bill is attached at Tab D.
869791 v1
I-1
Chapter 16
A.
Community Property. Pursuant to Section 2.1 of the Trust, Mr. and Mrs. B had agreed that all
property transferred to the Trust was their community property unless it had been designated as separate property.
B.
Disposition After Death of First Grantor. The Trust provides, in Section 4.2, that the trust property
would be divided into three separate trusts on the death of the first Grantor to die. The constituent trusts are
nominated as the Survivor’s Trust, the Bypass Trust and the Marital Deduction Trust.
1. Survivor’s Trust. Mrs. B, as Trustee, has elected to name the Survivor’s Trust as the Mrs. B
Survivor’s Trust (“Survivor’s Trust”). The following trust property is to be distributed to the Survivor’s Trust (Trust
§ 4.3):

Mrs. B’s one-half interest trust property held as community property;

Mrs. B’s separate property;

Mrs. B’s community property interests in life insurance proceeds payable to the Trust; and

Any property Mrs. B subsequently adds to the Trust.
2. Bypass Trust. Mrs. B, as Trustee, has elected to name the Bypass Trust as the Mrs. B Bypass
Trust (“Bypass Trust”). The Trust requires the distribution of a pecuniary amount to the Bypass Trust equal to the
estate tax exemption available to Mr. B’s estate, less relevant deductions and expenses. (Trust § 4.5, as amended by
the Second Amendment.) The estate tax exemption as of Mr. B’s death was $2,000,000.
3. Marital Deduction Trust. The remainder of the trust property not distributed to the Survivor’s
Trust or the Bypass Trust would be distributed to the Marital Deduction Trust. (Trust § 4.7.) As will be seen below,
the Marital Deduction Trust will not be funded.
V. Form 706 Estate Tax Return and Date of Death Values.
Mrs. B, as the named Personal Representative and as Trustee, has determined not to file a Form 706 United
States Estate (and Generation-Skipping Transfer) Tax Return (“Return”) because Mr. B’s gross estate for federal
estate tax purposes, which totaled approximately $1,278,240, was substantially less than the applicable exemption
amount of $2,000,000.
A.
Non-Probate Assets. Mr. B’s gross estate also included the following non-probate assets:
CHART NO. 1 – NON-PROBATE ASSETS
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
Property Controlled by Beneficiary Designations - to Mrs. B
Mr. B's Fidelity IRA Account No. ____________
$60,000.00
Allianz Annuity Contract No. ____________
$11,000.00
SUBTOTAL BENEFICIARY DESIGNATIONS TO MRS. B
Property Controlled by B Living Trust Agreement, dated February 27,
1998
½ Residence - ____________ Drive
½ Ameritrade Account No. _____________
25.29% of B Enterprises, LLC (separate property)
½ Cash
$110,000.00
$357,117.00
$344,184.00
$1,075.00
½ 1st NM Bank Account No. __________
869791 v1
$71,000.00
$19,764.00
I-2
Chapter 16
½ TD Bank USA Account No. __________
$364,957.00
SUBTOTAL OTHER LIVING TRUST PROPERTIES
TOTAL
$1,197,097.00
$1,268,097.00
The gross estate’s non-probate property, except as noted, was the community property of Mr. and Mrs. B. The
values reported in Chart No. 1, above, reflect only the Estate’s interest in such property.
B.
Debts and Expenses. Mr. B’s estate owed no debts. The administration expenses through September
30, 2008 totaled $________. Total debts and expenses therefore totaled $____________, as follows:
AMOUNT
Debts
SUBTOTAL OF DEBTS
$0.00
$0.00
Funeral Expenses
$5,694.09
Accounting Fees
Attorneys' Fees (through 09/30/08, plus
estimate for future fees)
$_________
SUBTOTAL OF EXPENSES
$_________
TOTAL
$5,694.09
C.
Gross Estate. Assets from the probate estate and the non-probate estate totaled $1,268,097. The
following chart illustrates the addition of the two estates.
CHART NO. 3 – GROSS ESTATE
Probate Estate
Non-Probate Estate
(Debts and Expenses)
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$0.00
$1,268,097.00
($__________)
GROSS ESTATE
$1,268,097.00
D.
Estate Tax Exemption and Marital Deduction. In 2007, the year of Mr. B’s death, the applicable
exemption from estate taxes was $2,000,000. Mr. B did not make any lifetime taxable gifts. Accordingly, the Estate
had $2,000,000 of the exemption available at Mr. B’s death. The Estate also is entitled to the marital deduction for
all assets that pass to a United States citizen spouse. Because the total value of the gross estate ($1,268,097) was less
than $2,000,000, no estate taxes were owed.
VI. Transactions and Dispositions during Administration. Neither the Personal Representative nor the
Trustee disposed of or otherwise liquidate any assets of the Estate during administration, except with respect to the
assets in the Ameritrade Account No. ________________. This account has been actively managed since the date of
death. The transactions in the account are too numerous to detail in this Memorandum.
VII. Allocation of Estate Administration Income, Debts and Expenses.
A.
Income. The Trust does not direct the allocation of income the trust estate generates during
administration. New Mexico law, however, supplies default provisions for the allocation of trust income when not
869791 v1
I-3
Chapter 16
addressed in a Trust. The net income of the trust estate is to be determined in accordance with the New Mexico
Uniform Principal and Income Act and distributed as follows:

The beneficiary is entitled to receive a portion of the net income equal to the beneficiary’s fractional
interest in the undistributed principal assets immediately before the distribution date, including assets
that later may be sold to meet principal obligations.

The beneficiary’s fractional interest in the undistributed principal assets must be calculated without
regard to property specifically given to a beneficiary and property required to pay pecuniary amounts
not in trust.

The beneficiary’s fractional interest in the undistributed principal assets must be calculated on the
basis of the aggregate value of those assets as of the distribution date without reducing the value by
any unpaid principal obligation.

The distribution date for purposes of this section may be the date as of which the fiduciary calculates
the value of the assets if that date is reasonably near the date on which assets are actually distributed.
N.M. STAT. § 45-3A-202(b). The Trustee also may apply the above rules to net capital gain or loss realized during
administration. Id. § 46-3A-202(d).
Before administration of the Trust was closed, it generated $________ in income, primarily from its interests
in the bank accounts and securities accounts. Such income is therefore allocated proportionately among the
distributions to the Survivor’s Trust and the Bypass Trust, the only two remainder beneficiaries.
B.
Debts and Expenses. The Trust directs that administration expenses and taxes be paid from Mr. B’s
share of the trust assets. (Trust, § 4.1.) The debts and expenses of $_______ must therefore be charged against the
distribution to the Bypass Trust.
VIII.
Distributions.
A.
Trust Assets. After deducting sufficient assets to account for the Trust’s debts and expenses of
$_______ and adding back in the Trust’s income during administration of $________, the Trustee distributed a total
date of death value of assets from the trust assets in accordance with the Trust, Sections 4.2 and 4.3 to the Mrs. B
Survivor’s Trust and the Mrs. B Bypass Trust, as follows:
CHART NO. 4 – DISTRIBUTION OF TRUST ASSETS TO BYPASS TRUST
DOCUMENTATION
DATE OF
DEATH VALUE
½ Residence
$110,000.00
½ Ameritrade Account No.
$357,117.00
25.29% of B Enterprises,
LLC (separate property)
Cash
$344,184.00
$1,075.00
½ 1st NM Bank Acct. No.
$19,764.00
½ TD Bank USA Acct. No.
$364,957.00
___
(Less Expenses)
TOTAL
869791 v1
$1,197,097.00
I-4
Chapter 16
CHART NO. 5 – ASSETS TRANSFERRED TO SURVIVOR’S TRUST
DOCUMENTATION
DATE OF
DEATH VALUE
½ Residence
$110,000.00
½ Ameritrade Account No.
$357,117.00
25.29% of B Enterprises,
LLC (separate property)
Cash
$344,184.00
$1,075.00
½ 1st NM Bank Acct. No.
$19,764.00
½ TD Bank USA Acct. No.
$364,957.00
___
(Less Expenses)
TOTAL
$1,197,097.00
B.
Mr. B’s Life Insurance Policy. Mrs. B was the named beneficiary of the life insurance trust. Mrs. B,
in her individual capacity, has contacted the carrier insuring Mr. B’s life and transferred the death benefits of
$120,000 to an account for the Survivor’s Trust. Mr. B’s one-half community property interest in the life insurance
policy was $60,000.
C.
Allianz Annuity. Mrs. B, in her individual capacity and as the named death beneficiary, has
contacted Allianz and has transferred the Annuity to her name. She understands she will need to execute a new
beneficiary designation to ensure the death benefits on her death, if any, are paid in accordance with her wishes.
IX. Reconciliation. The following chart illustrates the reconciliation of the distributions of the Estate:
CHART NO. 6 – RECONCILIATION OF ESTATE
DISTRIBUTION
To Mrs. B from Annuity
To Mrs. B from Life Insurance
SUBTOTAL TO MRS. B
To Bypass Trust from Living Trust
SUBTOTAL TO CONSTITUENT TRUSTS
DATE OF
DEATH VALUE
$11,000.00
$60,000.00
$71,000.00
$1,197,097.00
$1,197,097.00
SUBTOTAL OF ALL DISTRIBUTIONS
$1,268,097.00
Gross Estate from Chart No. 1
DIFFERENCE
$1,268,097.00
$0.00
X. Allocation of Generation-Skipping Transfer Tax Exemption. In addition to the estate tax, the federal
government also imposes a tax on generation-skipping transfers (the “GSTT”). Generally speaking, the GSTT is
imposed on all transfers that skip a generation. The most common example is a transfer from a grandparent to a
grandchild. Transfers to trusts that might make a distribution that skips a generation also are subject to the GSTT.
One common example is a trust designed to provide benefits to a child for his or her life and then to provide benefits
for that child’s children (i.e., the grantor’s grandchildren).
Each person has an exemption from the GSTT equal in amount to the estate tax exemption applicable for the
year of the person’s death. Mr. B had a potential GSTT exemption of $2,000,000. As Mr. B did not make any
lifetime gifts subject to the GSTT, her Estate still had $2,000,000 of the exemption available at her death.
Under federal law, Mr. B’s GSTT exemption is automatically allocated to a trust that has GSTT potential.
869791 v1
I-5
Chapter 16
Because the Mrs. B Bypass Trust has GSTT potential, a sufficient portion of the exemption is automatically allocated
to it. Further, because the allocated exemption exceeded the amount eventually distributed to the trust (after payment
of expenses), the Bypass Trust has an inclusion ration of zero. This means that all distributions from the Trust,
regardless of whether they skip a generation and regardless of the amount, will be exempt from the GSTT.
Here, the Bypass Trust is designed to avoid estate taxation in Mrs. B’s estate. On its termination at Mrs. B’s
death, the Bypass Trust will be distributed to the Generation-Skipping Trust for the benefit of the children of Mr. and
Mr. B. (Trust, § 6.3.) Further, and to the extent the assets in the Survivor’s Trust do not exceed Mrs. B’s GSTT
exemption, its assets also will be distributed to the Generation-Skipping Trust. Because the Generation-Skipping
Trust will therefore have an inclusion ratio of zero, all distributions to skip persons (i.e., the Bs’ grandchildren and
lower descendants) will be exempt from the GSTT despite the growth in value the trust might experience.
XII. Other Matters.
Tax Identification Number. The Trustee obtained a federal tax identification number for the Mrs. B
Bypass Trust on _____, 2008, which is _______. A copy of the SS-4 is attached at Tab I. The tax number of the
Mrs. B Survivor’s Trust will be Mrs. B’s social security number.
XIII.
Acceptance of Memorandum. The undersigned have read, approved and accepted this Memorandum
on the dates set forth next to their respective names, effective September 30, 2008.
869791 v1
I-6
Chapter 16
Exhibit J – Sample Closing Memorandum
706 & Fairly Representative Funding of QTIP Trust
EFFECTIVE AS OF MARCH 31, 2007
This Estate Distribution and Closure Memorandum (“Memorandum”) has three primary purposes. First, the
Memorandum documents the distribution of the assets of the Estate of ___________, Deceased (“Estate”) to the
devisees under the Last Will and Testament of ___________ (“Will”). Second, the Memorandum documents the
funding of the testamentary trusts created by the Will. Third, the Memorandum documents the distribution of nonprobate assets (i.e., those assets that passed outside the Will).
I.
Family Information.
A.
Deceased. _________ (“Mr. C”) died in El Paso County, Texas on ______, 2005.
B.
Survivors. Mr. C was survived by his wife, _________ (“Mrs. C”). His only child, ________, was
predeceased.
A.
Will. Mr. C executed his Will on _______, 1999. A copy of the Will is attached at Tab A. He did not
execute any codicils. The Will was admitted to probate on _________, 2006, in the case styled In the Matter of the
Estate of ___________, Deceased, Cause Number _________, in the Probate Court of El Paso County, Texas.
B.
Executor. The Court appointed Mrs. C as Independent Executor, to serve without bond, on ______,
2006. Mrs. C filed her oath on the same date.
C.
Proceedings in Idaho. The Estate owns real property located in Idaho. Probate proceedings were
filed in Valley County, Idaho on ________, 2007, in the case styled In the Matter of the Estate of ________,
Deceased, Case Number _________, in the Fourth Judicial District for Valley County, Idaho, Magistrate Division.
Mrs. C was appointed the Personal Representative of the Estate on _______, 2007.
A.
Gifts. The Will made the following four gifts to or for the benefit of Mrs. C, if she survived Mr. C:
1. All of Mr. C’s interest in any residence, all household goods, furnishings, personal effects and
automobiles. (Will, Part Two ¶ 1(a).)
2. All of Mr. C’s interest in any employee benefit plans owned by Mrs. C. (Will, Part Two ¶ 1(b).)
3. Assets equal in value to a dollar amount defined by a formula known as the “unlimited marital
deduction amount”, in a trust known as the QTIP Trust. (Id. ¶ 1(c).) The formula requires the executor to calculate
the smallest dollar amount that would result in the least possible federal estate tax on the Estate after taking into
account allowable deductions, the applicable credit amount ($1,500,000 in the year of Mr. C’s death) and other
pertinent factors. (Id., Part Three ¶ 5.) The Will also requires the Executor to choose assets to fund the QTIP Trust
based on a fairly representative standard such that the assets are valued as of the date of distribution and have an
aggregate fair market value that is fairly representative of the appreciation or depreciation of all assets available for
distribution. (Id.)
4. The residue (everything else) of the Estate, in a trust known as the Credit Shelter Trust. (Will,
Part Two ¶ 1(d).)
869791 v1
J-1
Chapter 16
B.
Payment of Debts and Taxes. The Will required that all debts and taxes be paid out of the residue of
the estate. (Will, Part Three ¶ 4.) The Estate had no debts and owed no taxes. Therefore, the value of the gift to
Mrs. C of the residue will be reduced only by the amount of administration expenses.
IV. Form 706 Estate Tax Return and Date of Death Values.
Mrs. C, as Executor, timely filed a Form 706 United States Estate (and Generation-Skipping Transfer) Tax
Return (“Return”) on _______, 2006. The Return reported a total gross estate based on date of death values equal to
$4,014,101. The Return also indicated that no estate taxes were due because of a combination of the unlimited
marital deduction and credit shelter trust techniques used in the Will. A copy of the Return, without the schedules, is
attached at Tab B. The IRS accepted the Return as filed and issued an Estate Tax Closing Document, a copy of
which is attached at Tab C, on February 21, 2007.
The total gross estate reported by the Return included both probate assets (i.e., property that passed by the
Will) and non-probate assets (i.e., property that did not pass by the Will). Only probate assets are available to fund
the gifts under the Will. The probate assets reported in the Return include the following:
CHART NO. 1 – PROBATE ASSETS REPORTED ON RETURN
RETURN
SCHEDULE
A
A
A
A
B
B, C
B, C
RETURN
SCHEDULE
B
B
B
C
F
F
TOTAL
Residence, ___________, El Paso, Texas
Real Estate, ____________, Idaho
Real Estate, _______________, Idaho – Parcel 14
Real Estate, _______________, Idaho – Parcel 25
U. S. Savings Bonds
Charles Schwab Account No. ______, consisting of various
securities and cash6
Merrill Lynch Account No. ________, consisting of various
securities and cash7
Alliant Energy Corp. Stock
Vanguard/Wellington Fd
Vanguard/Wellington Fd.
Three Certificates of Deposit at Discover Bank
Miscellaneous personal effects, household goods and furnishings
Four automobiles
DATE OF DEATH VALUE
OF ESTATE’S INTEREST
$ 150,000
$ 112,500
$ 47,500
$ 12,500
$
946
$ 425,209
$2,634,198
DATE OF DEATH VALUE
$
2,282
$
2,207
$
9,467
$ 139,352
$ 14,860
$ 15,312
$3,566,333
Non-probate assets reported in the Return include the following:
4
On the Return, Parcel 1 is composed of the South one-half of Lot 3 and all of Lot 4, Block B, Town of _______. The appraiser
had appraised the two lots together as one piece.
5
On the Return, Parcel 2 is composed of Lot 5, Block B, __________. Note that there is only one Warranty Deed evidencing
Mr. and Mrs. C’s ownership of the three Lots in Block B, Town of __________.
6
The Charles Schwab account was originally held by Mr. C and Mrs. C as joint tenants with rights of survivorship. On ____,
2006, Mrs. C timely filed a qualified disclaimer of her interests in the account as a joint tenant with rights of survivorship, only,
in the Texas probate proceeding. As a result of the disclaimer, Mr. C’s interests in the account assets became probate assets.
7
The disclaimer filed by Mrs. C also disclaimed her survivorship rights in the Merrill Lynch account and gave the same result
such that Mr. C’s interests in the account assets became probate assets.
869791 v1
J-2
Chapter 16
CHART NO. 2 – NON-PROBATE ASSETS REPORTED ON RETURN
RETURN
SCHEDULE
D
D
G
TOTAL
DATE OF DEATH VALUE
$ 58,000
$ 12,934
$ 376,8358
$ 447,769
Metropolitan Life insurance policy
New York Life insurance policy
Assets transferred to 1999 Charitable Remainder Unitrust
Schedule M-1 of the Return reported the amount allocated to the Credit Shelter Trust as $1,455,000
(applicable exclusion amount of $1,500,000 less debts and expenses of $45,000 not deducted on the Return equals
$1,455,000). Schedule M-1 also reported the amount claimed for the marital deduction as $2,331,818 (total estate of
$4,014,101, less debts and expenses of $5,222 claimed on the Return, less the amount of $1,455,000 going to the
Credit Shelter Trust, less the charitable deduction of $222,061 related to the Charitable Remainder Unitrust equals
$2,331,818). Part Three, Item 5 of the Return reports that the amount ultimately allocated to the QTIP Trust was
$1,925,936 (marital deduction of $2,331,818, less specific gifts for which marital deduction claimed of $180,172,
less insurance proceeds of $70,934, less the date of death value of the Unitrust of $154,774, equals $1,925,938).9
Assets available for distribution to either the QTIP Trust or the Credit Shelter Trust are only the probate
assets which were not the subject of a specific gift. Those assets are as follows:
CHART NO. 3 – ASSETS AVAILABLE FOR DISTRIBUTION
RETURN
SCHEDULE
A
A
A
B
B, C
B, C
B
B
B
C
C
C
DATE OF DEATH VALUE
$ 112,500
$ 47,500
$ 12,500
$
946
$ 425,209
Real Estate, __________, Idaho
Real Estate, __________, Idaho – Parcel 1
Real Estate, __________, Idaho – Parcel 2
U. S. Savings Bonds
Charles Schwab Account No. __________, consisting of various
securities and cash
Merrill Lynch Account No. __________, consisting of various
securities and cash
Alliant Energy Corp. Stock
Vanguard/Wellington Fd
Vanguard/Wellington Fd.
Discover Bank CD __________
Discover Bank CD __________
Discover Bank CD __________0
$2,634,198
$
2,282
$
2,207
$
9,467
$ 51,874
$ 45,578
$ 41,900
$3,386,161
TOTAL
V. Transactions, Distributions and Dispositions during Administration.
following assets of the estate were disposed of as indicated:
During the administration, the
CHART NO. 4 – TRANSACTIONS DURING ADMINISTRATION
Charles Schwab Account
300 Shares Albertson’s, Inc.
150 Shares P F Chang’s China
Bistro, Inc.
ACTION
Sold 06/05/06
Sold 12/15/06
GROSS
PROCEEDS
$
$
6,105
5,511
PROCEEDS DEPOSITED INTO
Schwab Money Market
Schwab Money Market
8
Because of the application of Section 2036 of the Code, the entire amount of Mr. C’s one-half community interest in the
Unitrust at the time of the gift was includable in his estate. However, Mr. C’s one-half community interest in the Unitrust at the
time of his death was only $154,774, while the value of the charitable remainder was $222,061, as shown on Schedule G-1.
9
A rounding error accounts for the $2.00 difference between the calculation shown and the amount claimed on the Return.
869791 v1
J-3
150 Shares Wendy’s Intl Inc.
Discover Bank CDs10
Estate’s ½ of CD #__________
Estate’s ½ of CD #__________
Estate’s ½ of CD #__________
Chapter 16
Sold 7/13/06
Interest —
Various Dates
Matured —
10/05/06
Interest —
Various Dates
Interest —
Various Dates
Matured —
09/07/06
Interest —
Various Dates
Matured —
12/12/05
Interest —
Various Dates
Matured —
12/12/06
Interest —
Various Dates
$
8,873
Schwab Money Market
$
2,155
Renewed CD
$
51,874
Renewed CD
$
889
$
1,869
Renewed CD
$ 45,578
Renewed CD
$
CD
1,233
CD
$ 41,900
Renewed CD
$
1,889
Renewed CD
$ 41,900
Renewed CD
$
CD
551
VI. Allocation of Estate Administration Income and Expenses.
The Will directs that administration expenses be paid out of the residue of the estate. (Will, Part Three, ¶ 4.)
The Will does not, however, direct the allocation of income the estate generates during administration. Texas law,
however, provides the necessary direction for the allocation of estate income. The net income of the estate is to be
determined in accordance with the Texas Principal and Income Act, TEX. PROP. CODE Ch. 116, and distributed as
follows:


TEX. PROB. CODE §§ 378B(b), (c), (d). The executor is granted discretion to allocate the income in a fair and
expense. Id. § 378B(h).
The administration expenses total $45,000.11 They are calculated as follows:
Court Costs:
(included in legal fees)
Accounting Fees:
$ 1,968
Attorneys’ Fees:
$34,658
Federal Income Taxes
$ 8,129
Other Expenses Claimed
On Return
$ 245
Total
$45,000
Such expenses must be charged against the residue of the estate, which is the gift to the Credit Shelter Trust.
The income of the estate through March 31, 2007 equals $170,792. The income is calculated as follows:
10
11
The information for the CDs is based on telephone conversations with DiscoverBank on July 24, 2007 and August 13, 2007.
The funeral expenses of $5,222 were deducted on the Return and are therefore not allocated to the Credit Shelter Trust.
869791 v1
J-4
Chapter 16
Total Dividends and Interest in the
2005
$ 4,981
2006
$ 20,641
2007
$ 5,346
Total Charles Schwab Income12
$ 30,968
One-half of Charles Schwab income
(representing estate’s share)
$ 15,484
Total Dividends and Interest in the
Merrill Lynch Account
2005
$ 42,567
2006
$196,629
2007
$ 54,250
Total Merrill Lynch Income13
$293,446
One-half of Merrill Lynch income
$146,723
DiscoverBank Certificates of
Deposit Interest
CD #__________
CD #__________
CD #__________
$ 6,086
$ 6,203
$ 4,880
Total DiscoverBank Income
$ 17,169
One-half of DiscoverBank income
$ 8,585
Total from the estate’s share of the income $170,792
As none of the assets made the subject of a specific gift generated income, no income will be allocated to Mrs.
C, individually, as the recipient of those gifts. The Executor has determined that the most fair and equitable method
of allocating income between the Credit Shelter Trust and the QTIP Trust, considering all relevant factors, including
administrative convenience and expense, is to distribute the income between the two devisees in proportion to the
devisee’s share of the total Date of Death Value of the assets being distributed to the devisees. Therefore, the estate’s
income is to be divided proportionately between the Credit Shelter Trust and the QTIP Trust. The Date of Death
Value total to be distributed to the two trusts is $3,386,161 (from Chart No. 5). The Date of Death Value amount
going to the QTIP Trust is $1,925,936. Therefore, the QTIP Trust’s proportionate share of the income is .5687668,
which was calculated as follows: $1,925,936 (value distributed to QTIP Trust ÷ $3,386,161 (value distributed to
Credit Shelter Trust and QTIP Trust) = .5687668. Conversely, the Credit Shelter Trust’s share of the estate’s income
is .4312332, calculated as follows: 1 – .5687668 (QTIP Trust’s share) = .4312332.
Ultimately, the Credit Shelter Trust will receive $73,651 in income (.4312332 x $170,792 (total income)).
The QTIP Trust will receive $97,141 in income (.5687668 x $170,792 (total income)).
VII. Computation of Fairly Representative Funding Values. The pecuniary “fairly representative” marital
12
The information for 2005 and 2006 is based on a telephone conference with __________, the broker handling the account.
The 2007 information is based on an account statement for the period ending March 31, 2007.
13
The information is based on a report generated by __________, the broker handling the account.
869791 v1
J-5
Chapter 16
deduction gift funding standard utilized in the Will has the effect of requiring the QTIP Trust and the Credit Shelter
Trust to share in both the appreciation and depreciation of the estate assets between the date of death, October 7,
2005, and the funding date, March 31, 2007 (the “Funding Date”).
While the Will does not contain a provision specifically giving the executor the power to distribute property
in a non pro rata manner, the Will gives such a power by reference to Texas statutes. First, the executor is given all
powers given to any Trustee under the Will. (Will, Part Three ¶ 2(a).) The Trustee is given all powers allowed by
the Texas Trust Code “as it now exists or is hereafter amended”. (Id. ¶ 3(a).) Section 113.027(2) of the Texas Trust
Code gives trustees the general power to distribute property in “disproportionate shares”. Accordingly, the Executor
has the power to pick and choose assets for funding the two trusts, within the confines of the fairly representative
funding standard.
The date of death value of the assets available for funding the two trusts was $3,386,161, as indicated in
Chart No. 3 above. The assets that passed directly to Mrs. C either as a non-probate asset or as a specific gift in the
Will are excluded from the fairly representative funding standard because all appreciation and depreciation
associated with these assets was automatically assigned to Mrs. C outside the discretion of the Executor. These
assets include the residence on __________, personal effects, household goods and furnishings, the four vehicles and
all non-probate assets, with a total date of death value of $627,941.
The total Funding Date value of those assets or their proceeds available for funding the trusts was
$3,872,512. The total Funding Date value was determined by revaluing all of the remaining assets as of the Funding
Date by the usual methods applicable in federal estate tax practice. The available assets for funding as of the
Funding Date are presented in tabular form in Chart No. 5 below. The table in Chart No. 5 breaks down the two
brokerage accounts into the specific assets held within the accounts. Values for assets that were formerly community
property reflect only the Estate’s one-half interest in the asset. Further, the table in Chart No. 5 only reflects one-half
of the number of shares of each security because the other half represents Mrs. C’s former community property
interest in the security.
CHART NO. 5 – ASSETS AVAILABLE FOR FUNDING
ASSET
Separate Property
80 Shares Alliant Energy Corp.
Stock (held in certificate form)
72 Shares Vanguard/Wellington
Fd (held in certificate form)
308.86 Shares Vanguard/
Wellington Fd (held in direct purchase
plan)
Total Separate Property
Community Property
One-half interest in Real Estate,
__________
__________. – Parcel 1
__________. – Parcel 2
One-half interest in U. S. Savings
Bonds
One-half interest in DiscoverBank
CD #__________
DATE OF DEATH
VALUE
FUNDING DATE
VALUE (03/31/07)
APPRECIATION/
(DEPRECIATION)
2,282
3,603
1,321
2,207
2,346
139
9,467
10,066
599
13,956
16,015
2,059
112,500
122,500
10,000
47,500
55,000
7,500
12,500
16,250
3,750
946
1,001
55
54,91714
015
51,874
14
This amount includes the estate’s share of interest ($3,043).
15
No gain is shown because the increase came from income.
869791 v1
DISPOSITION/
DATE/PROCEEDS
J-6
ASSET
CD #__________
CD #303-115040-0
Subtotal
Cash
5 Shares Agere Sys Inc
120 Shares 3M Co
150 Shares Alcoa Inc
38 Shares Agilent Technologies
Inc.
300 Shares Albertsons Inc/54.5
Shares SuperValue Inc.
129 Shares Allstate Corp
150 Shares Altria Group Inc
150 Shares American Capital
Strategies
300 Shares Apache Corp
558 Shares Aqua America Inc
333 Shares Bank of America
300 Shares Caterpillar Inc Del
169 Shares Chevron Corp New
300 Shares Conagra Foods Inc.
100 Shares Del Monte Foods Co
120 Shares Du Pont E I De
Nemours & Co
70 Shares Eastman Kodak Co
150 Shares El Paso Corp
220 Shares Exxon Mobil Corp
150 Shares General Electric
50 Shares Goodyear Tire &
Chapter 16
DATE OF DEATH
VALUE
45,578
DISPOSITION/
DATE/PROCEEDS
FUNDING DATE
VALUE (03/31/07)
48,68016
44,34018
41,900
312,798
342,688
60,923
51
8,596
3,458
1,199
7,544
Exchanged for
54.5 shares
SuperValue Inc
06/05/06
APPRECIATION/
(DEPRECIATION)
017
019
21,305
90,79120
111
9,152
5,102
1,281
021
60
556
1,644
82
2,122
(5,422)
6,961
10,936
5,438
7,738
11,608
6,654
777
672
1,216
20,074
20,208
14,114
16,860
10,210
7,244
1,062
4,558
21,319
16,703
16,905
20,063
12,561
7,438
1,140
5,915
1,245
(3,505)
2,791
3,203
2,351
194
78
1,357
1,652
1,930
13,072
5,132
708
1,594
2,186
16,663
5,296
1,561
(58)
256
3,591
164
853
13,776
5,378
8,558
250
3,578
3,258
7,602
17,633
8,017
8,269
242
2,863
4,196
10,720
3,857
2,639
(289)
(8)
(715)
938
3,118
Rubr
Co
375 Shares Heinz H J Co
200 Shares Hewlett Packard Co
225 Shares Home Depot Inc
6 Shares Imation Corp
150 Shares Intel Corp
115 Shares Intl Paper Co
222 Shares JPMorgan Chase &
Co
16
17
18
19
20
This amount includes the proceeds from the sale of the securities ($14,384) and income ($15,484) from the Schwab Account.
21
No gain is shown because the increase came from the sale of securities and income.
869791 v1
J-7
ASSET
2,000 Shares Lucent
Technologies Inc
Chapter 16
DATE OF DEATH
VALUE
6,430
DISPOSITION/
DATE/PROCEEDS
Exchanged for
390 shares Alcatel
Lucent 12/01/06
FUNDING DATE
VALUE (03/31/07)
4,605
APPRECIATION/
(DEPRECIATION)
(1,825)
6,727
1,815
1,863
(142)
3,148
0
124
(2,019)
150 Shares McDonalds Corp
150 Shares Micron Technology
Inc
150 Shares Mylan Labs Inc
150 Shares P F Changs China
Bistro Inc.
4,864
1,957
150 Shares Petsmart Inc
200 Shares Pfizer Inc
150 Shares Plum Creek Timber
Co Inc
150 Shares Procter & Gamble
3,417
4,919
5,380
4,919
5,065
5,918
1,502
146
538
8,432
9,428
996
87 Shares Scottish Pwr PLC
3,570
4,333
763
9,140
16,649
2,531
6,163
7,496
1,110
2,207
9,386
(65)
1,690
3,024
7,530
Sold 12/15/06
Proceeds
5,511
Co
Spon
ADR Final
150 Shares Sempra Energy
150 Shares Simon Ppty Group
6,609
10,486
New
225 Shares Sonic Corp/337.5
Shares
6,386
Exchanged for
69 shares of
Scottish Power
New ADR F in
April 2006
Inc
1.5 for 1 stock
split during
administration
150 Shares Southwest Airls Co
150 Shares Starbucks Corp/300
Shares
2,272
7,696
167.5 Shares Stora Enso Corp
Spon ADR Rep R
150 Shares Stryker Corp
150 Shares Target Corp
150 Shares TXU Corp/300
2,251
2,891
640
7,068
7,884
15,693
9,956
8,911
19,235
2,888
1,027
3,542
31,147
7,202
7,054
0
456
1,991
8,695
1,109
Shares
480 Shares United Technologies
Corp
150 Shares Wal-Mart Stores Inc
150 Shares Wendys Intl Inc
150 Shares Yum Brands Inc
869791 v1
2 for 1 stock
split during
administration
2 for 1 stock
split during
administration
23,945
6,598
6,882
7,586
J-8
Sold 07/13/06
Proceeds
8,873
ASSET
Total Charles Schwab Account
Cash and Cash Equivalents
Chapter 16
DATE OF DEATH
VALUE
425,209
DISPOSITION/
DATE/PROCEEDS
422,198
FUNDING DATE
VALUE (03/31/07)
494,568
APPRECIATION/
(DEPRECIATION)
53,875
023
22
563,699
½ Share Agere Sys Inc
6 Shares AT&T Corp
36 Shares Bellsouth Corp/92
Shares AT&T Corp
29,830 Shares Chevron Corp
New
10 Shares Comcast Corp New
5
4,964
116
916
12
5,526
237
1,814
7
562
121
898
2,206,227
404,197
390
106
5,763
9,735
1,357
1,047
6,768
60
932
(24)
4,180
854
4,637
2,138
6,144
1,687
5,889
2,413
1,964
833
1,252
275
3,074
171
876
3,911
255
1,062
837
84
186
27,890
27,155
(735)
24,239
24,473
234
26,298
25,961
(337)
24,560
24,967
407
26,294
25,506
(788)
24,480
24,429
(51)
25,888
25,719
(169)
13,206
12,835
(371)
1,802,030
284
C1
A/15 Shares
87 Shares Firstenergy Corp
300 Shares Great Plains Energy
Inc
200 Shares Idacorp Inc
26 Shares Lucent Technologies
Inc/5 Shares Alcatel Lucent
78 Shares Morgan Stanley
50 Shares Pactiv Corp
122 Shares PG&E Corp
50 Shares Pinnacle West Cap
Corp
225 Shares Sierra Pac Res New
10 Shares Tenneco Inc
28 Shares Verizon
Communications
25,000 Par Albuquerque N Mex
Gross Rcpts Ref Bds
25,000 Par Austin Tex Cmnty
College Dist Ltd Tax B
25,000 Par Bernalillo Cnty N
Mex Gross Rc Gross Rcp
25,000 Par Crosby Tex Indpt
Exchanged for
46 Shares AT&T
01/03/07
5 share stock
dividend paid
02/27/07
4,406
8,688
5,836
84
Exchanged for
5 Shares Alcatel
Lucent 12/01/06
Sch
District G O Sch B
25,000 Par Coastal Wtr Auth
Tex
Contract Rev Ref B
25,000 Par Colorado Wtr Res &
Pwr Dev Aut Rev Bd
25,000 Par Dallas Fort Worth
Tex
Intl Arp Jt Rev Bd
12,500 Par Dallas Tex Civic Ctr
Conventio Ref & Imp
22
This amount does not include the $25,000 withdrawn from the DiscoverBank CD and deposited in the Merrill Lynch account
because such funds came from Mrs. C’s interests in the CD. The amount also accounts for the funeral expenses of $5,222 that
should reduce the cash available for distribution as it was claimed as a deduction on the Return. It also includes the estate’s
share of income ($146,723) from the account.
23
869791 v1
J-9
ASSET
25,000 Par Dona Ana Cnty N
Mex Gross Rcpt Wtr Sys
25,000 Par Houston Tex Arpt
Chapter 16
DATE OF DEATH
VALUE
27,434
DISPOSITION/
DATE/PROCEEDS
FUNDING DATE
VALUE (03/31/07)
25,978
APPRECIATION/
(DEPRECIATION)
(1,456)
25,636
25,155
(481)
26,618
25,615
(1,003)
25,067
25,048
(19)
20,217
19,672
(545)
25,512
25,049
(463)
25,402
25,224
(178)
3,184,378
4,037,649
408,679
485,918
Sys
Rev Sub Lien
25,000 Par Houston Tex Indpt
Sch Dist G O Sch
25,000 Par Killeen Tex Ctfs
Obli
17,500 Par Texas Pub Bldg
Auth
Bldg Rev Bldg Rev
25,000 Par Texas Southn Univ
Rev Impt Bds
25,000 Par University N Mex
Univ Revs Sub Lien
Total Merrill Lynch Account
TOTAL
2,634,198
3,386,161
Date of death and Funding Date values for all securities are based on EstateVal, an estate tax valuation
software used by the attorneys for the Executor for estate tax returns, except the 69 shares of Scottish Power New
ADR F, which was based on the Charles Schwab account statement dated March 31, 2007. The values given may
differ slightly from the values that appear on an account statement because they are the mean between the high and
low prices on the day or days of valuation.
The net appreciation allocable to the QTIP Trust under the fairly representative funding standard is
calculated based on a six-step procedure, as follows:24
1.
Determine the assets available to satisfy the gift to the QTIP. (See Chart No. 5.)
2.
Determine the net appreciation or depreciation as of the funding date of the available assets. Here,
the net appreciation equals $485,918. (See Chart No. 5.)
3.
Divide the date of death value of the gift to the QTIP (here $1,925,936, see Return Part Three, Item
5) by the date of death value of all assets available to fund the gift (here $3,386,161, see Chart No. 5)
equals .5687668.
4.
Multiply the net appreciation or depreciation of $485,918 by the fraction obtained in step three
(.5687668) equals $276,374, which is the net appreciation allocable to the QTIP Trust gift.
5.
Add the date of death value of the gift to the QTIP Trust (here $1,925,936) plus the net appreciation
allocable to the QTIP Trust gift ($276,374) equals $2,202,310, which is the value of assets (less
income) that must be transferred to the QTIP Trust as of the date of funding.
6.
Add the estate’s income earned during administration allocable to the QTIP Trust (here $97,141)
plus the value of assets obtained in number 5, above, ($2,202,310) equals $2,299,451, which is the
total amount that must be distributed to the QTIP Trust.
Based on these parameters, the assets chosen for the QTIP Trust must meet the following criteria:
(1)
Total value - $2,299,451
(2)
Net appreciation - $276,374
24
The first five-steps of the procedure are found in 4 A. JAMES CASNER, ESTATE PLANNING § 13.10.2 n.11 (5th Ed.). The sixth
step is necessary because the Estate earned income during administration.
869791 v1
J-10
(3)
Chapter 16
Income - $97,141
The Executor has determined to allocate the following available assets listed in Chart No. 6 to the QTIP Trust to
fund the pecuniary marital deduction gift to the Trust:
CHART NO. 6 – ASSETS ALLOCATED TO QTIP TRUST 25
Asset
80 Shares Alliant Energy Corp. Stock (held in
certificate form)
72 Shares Vanguard/Wellington Fd (held in
certificate form)
308.86 Shares Vanguard/ Wellington Fd (held in
direct purchase plan)
One-half interest in Real Estate, __________
One-half interest in Real Estate, __________–
Parcel 1
One-half interest in Real Estate, __________–
Parcel 2
One-half interest in U. S. Savings Bonds
One-half interest in DiscoverBank CD
#__________
#__________
#__________
Cash
5 Shares Agere Sys Inc/10 shares LSI
120 Shares 3M Co
150 Shares Alcoa Inc
38 Shares Agilent Technologies Inc. plus 2
Shares Verigy Ltd.26
300 Shares Albertsons Inc/54.5 Shares
Supervalue Inc27
150 Shares Altria Group Inc, plus 104.5
Shares Kraft Foods28
150 Shares American Capital Strategies
300 Shares Apache Corp
558 Shares Aqua America Inc
QTIP
Trust
Allocation
Value
3,603
QTIP
Trust
Appreciation/
Depreciation
1,321
2,346
139
10,066
599
122,500
55,000
10,000
7,500
16,250
3,750
1,001
54,917
55
0
48,680
0
44,340
0
0
111
9,152
5,102
1,281
0
60
556
1,644
82
2,122
(5,422)
7,738
11,608
777
672
6,654
21,319
16,703
1,216
1,245
(3,505)
25
Some time passed between the date of death and the Funding Date. Accordingly, some changes occurred through mergers,
stock exchanges, stock dividends and sales. The securities actually allocated to the QTIP Trust are in bold for those securities
that experienced changes.
26
On June 1, 2006, Agilent distributed shares of Verigy to its shareholders. The Executor did not discover this distribution until
September 2007. Because only 4 total shares were distributed (only one-half of which belonged to the estate), the Executor
made the decision to ignore the Verigy shares and not recalculate the fairly representative amounts for administrative ease.
27
Immediately before funding, Mrs. C, as Trustee, distributed one-half share of Supervalue stock to herself for her maintenance
and support. Therefore, the QTIP Trust only received 54 shares.
28
On March 30, 2007, Altria distributed shares of Kraft Foods to its shareholders. The estate received 103.5 shares of Kraft
Foods. Immediately before funding, Mrs. C, as Trustee, distributed one-half share of Kraft Foods stock to herself for her
maintenance and support. Therefore, the QTIP Trust only received 103 shares.
869791 v1
J-11
Chapter 16
Asset
333 Shares Bank of America
300 Shares Caterpillar Inc Del
169 Shares Chevron Corp New
300 Shares Conagra Foods Inc.
100 Shares Del Monte Foods Co
120 Shares Du Pont E I DeNemours & Co
70 Shares Eastman Kodak Co
150 Shares El Paso Corp
220 Shares Exxon Mobil Corp
150 Shares General Electric
50 Shares Goodyear Tire & Rubr Co
375 Shares Heinz H J Co
200 Shares Hewlett Packard Co
225 Shares Home Depot Inc
6 Shares Imation Corp
150 Shares Intel Corp
115 Shares Intl Paper Co
222 Shares JPMorgan Chase & Co
2,000 Shares Lucent Technologies Inc/390
Shares Alcatel Lucent
150 Shares McDonalds Corp
150 Shares Micron Technology Inc
150 Shares Mylan Labs Inc
150 Shares P F Changs China Bistro Inc./0
Shares
150 Shares Petsmart Inc
200 Shares Pfizer Inc
150 Shares Plum Creek Timber Co Inc
150 Shares Procter & Gamble Co
87 Shares Scottish Pwr PLC Spon ADR Final/45
Shares Iberdola29
150 Shares Sempra Energy
150 Shares Simon Ppty Group Inc New
225 Shares Sonic Corp/337.5 Shares30
150 Shares Southwest Airls Co
150 Shares Starbucks Corp/300 Shares
167.5 Shares Stora Enso Corp Spon ADR Rep
R31
150 Shares Stryker Corp
150 Shares Target Corp
150 Shares TXU Corp/300 Shares
480 Shares United Technologies Corp
150 Shares Wal-Mart Stores Inc
150 Shares Wendy’s Intl Inc/0 Shares
150 Shares Yum Brands Inc
29
QTIP
Trust
Allocation
Value
16,905
20,063
12,561
7,438
1,140
5,915
1,594
2,186
16,663
5,296
1,561
17,633
8,017
8,269
242
2,863
4,196
10,720
4,605
QTIP
Trust
Appreciation/
Depreciation
2,791
3,203
2,351
194
78
1,357
(58)
256
3,591
164
853
3,857
2,639
(289)
(8)
(715)
938
3,118
(1,825)
6,727
1,815
3,148
0
1,863
(142)
124
(2,019)
4,919
5,065
5,918
9,428
4,333
1,502
146
538
996
763
9,140
16,649
7,496
2,207
9,386
2,891
2,531
6,163
1,110
(65)
1,690
640
9,956
8,911
19,235
31,147
7,054
0
8,695
2,888
1,027
3,542
7,202
456
1,991
1,109
On June 28, 2007, the Scottish Power shares were exchanged for 45 shares of Iberdola.
30
Immediately before funding, Mrs. C, as Trustee, distributed one-half share of Sonic stock to herself for her maintenance and
support. Therefore, the QTIP Trust only received 337 shares.
31
Immediately before funding, Mrs. C, as Trustee, distributed one-half share of Stora Enso stock to herself for her maintenance
and support. Therefore, the QTIP Trust only received 167 shares.
869791 v1
J-12
Chapter 16
Asset
½ Share Agere Sys Inc/1 share LSI
3 Shares AT&T Corp
18 Shares Bellsouth Corp/46 Shares AT&T
Corp
14,450 Shares Chevron Corp New
QTIP
Trust
Allocation
Value
299,126
12
2,763
119
907
QTIP
Trust
Appreciation/
Depreciation
0
7
281
61
449
1,068,7
195,798
182
2,848
4,868
3,384
24
49
671
524
466
(10)
3,072
982
844
2,945
1,207
1,964
128
531
16,293
417
626
138
420
42
93
(441)
9,789
94
15,577
(202)
9,987
163
15,304
(473)
9,772
(20)
10,288
(68)
7,701
(223)
10,062
10,019
8,431
(192)
(8)
(234)
10,020
10,090
(185)
(71)
22
5 Shares Comcast Corp New C1 A/7 Shares
150 Shares Great Plains Energy Inc
13 Shares Lucent Technologies Inc/2 Shares
Alcatel Lucent
39 Shares Morgan Stanley plus 39 Shares
Discover Financial Services32
61 Shares PG&E Corp
25 Shares Pinnacle West Cap Corp
14 Shares Verizon Communications
15,000 Par Albuquerque N Mex Gross Rcpts Ref
Bds
10,000 Par Austin Tex Cmnty College Dist Ltd
Tax B
15,000 Par Bernalillo Cnty N Mex Gross Rc
Gross Rcp
10,000 Par Crosby Tex Indpt Sch District G O
Sch B
15,000 Par Coastal Wtr Auth Tex Contract Rev
Ref B
10,000 Par Colorado Wtr Res & Pwr Dev Aut
Rev Bd
10,000 Par Dallas Fort Worth Tex Intl Arp Jt Rev
Bd
7,500 Par Dallas Tex Civic Ctr Conventio Ref &
Imp33
10,000 Par Houston Tex Arpt Sys Rev Sub Lien
10,000 Par Killeen Tex Ctfs Obli
7,500 Par Texas Pub Bldg Auth Bldg Rev Bldg
Rev34
10,000 Par Texas Southn Univ Rev Impt Bds
10,000 Par University N Mex Univ Revs Sub
Lien
Total
2,299,456
276,391
32
On June 30, 2007, Morgan Stanley distributed shares of Discover Financial Services to its shareholders. The Estate received
39 shares.
33
Immediately before funding, Mrs. C, as Trustee, distributed 2,500 Par of the bonds to herself for her maintenance and support.
Therefore, the QTIP Trust only received 5,000 Par.
34
Immediately before funding, Mrs. C, as Trustee, distributed 2,500 Par of the bonds to herself for her maintenance and support.
Therefore, the QTIP Trust only received 5,000 Par.
869791 v1
J-13
Chapter 16
Asset
QTIP
Trust
Allocation
Value
2,299,451
5
Goals
Difference
QTIP
Trust
Appreciation/
Depreciation
276,374
17
After the Executrix received the IRS Closing Letter, she discovered that Mr. C had owned an additional 233
shares of Alliant Energy Corp. stock, held by the transfer agent. Such stock had a date of death value of $6,645 and a
Funding Date value of $10,494. The shares have been allocated to the QTIP Trust. Because the shares only increase
the appreciation allocated to the QTIP Trust, they do not affect the fairly representative analysis.35
The allocation in Chart No. 6 above satisfies the fairly representative funding standard because both the total
value and the net appreciation value criteria have been exceeded, slightly. The allocation also satisfies the Texas
Principal and Income Act in that it allocates to the QTIP Trust its proportionate share of the estate’s income.
The remaining assets from Chart No. 5 are therefore generally available for funding the Credit Shelter Trust.
The total value, as of March 31, 2007, of assets allocated to the Credit Shelter Trust is $1,738,195, calculated as
follows: applicable credit amount ($1,500,000) less expenses ($45,000), plus net appreciation allocated to the Credit
Shelter Trust ($209,544), plus income allocated to the Credit Shelter Trust ($73,651) equals total value ($1,738,195).
Because the estate’s income was paid in cash, the cash allocated to the trust must be at least $73,651. The following
Chart No. 7 shows the assets allocated to the Credit Shelter Trust, which are the remaining assets, accounting for the
Credit Shelter’s share of the income and the estate’s expenses:
CHART NO. 7 – ASSETS ALLOCATED TO CREDIT SHELTER TRUST36
Asset
Credit Shelter
Trust
Allocation
Value
Cash
3 Shares AT&T Corp
18 Shares Bellsouth Corp/46 Shares
AT&T Corp
15,380 Shares Chevron Corp New
5 Shares Comcast Corp New C1 A/8
Shares
150 Shares Great Plains Energy Inc
13 Shares Lucent Technologies Inc/3
Shares Alcatel Lucent
39 Shares Morgan Stanley
CST Appreciation/
Depreciation
90,791
0
264,574
2,763
119
907
0
281
61
449
1,137,505
57
208,399
8
2,915
4,868
3,384
36
686
524
466
(14)
3,072
844
982
417
35
The Executrix has been advised by her attorneys that she may have a duty to inform the IRS of the additional Alliant Energy
Corp. shares of stock and that she should file an amended inventory in the probate proceeding. Given that Mr. C’s estate is nontaxable in any event, the Executrix has decided to avoid additional attorneys’ fees and treat the additional shares as a de minimus
change.
36
Some time passed between the date of death and the Funding Date. Accordingly, some changes occurred through mergers,
stock exchanges, stock dividends and sales. The securities actually allocated to the Credit Shelter Trust are in bold for those
securities that experienced changes.
869791 v1
J-14
Chapter 16
Asset
61 Shares PG&E Corp
25 Shares Pinnacle West Cap Corp
14 Shares Verizon Communications
10,000 Par Albuquerque N Mex Gross
Rcpts Ref Bds
15,000 Par Austin Tex Cmnty College
Dist Ltd Tax B
10,000 Par Bernalillo Cnty N Mex Gross
Rc Gross Rcp
15,000 Par Crosby Tex Indpt Sch District
G O Sch B
10,000 Par Coastal Wtr Auth Tex
Contract Rev Ref B
15,000 Par Colorado Wtr Res & Pwr Dev
Aut Rev Bd
15,000 Par Dallas Fort Worth Tex Intl Arp
Jt Rev Bd
5,000 Par Dallas Tex Civic Ctr Conventio
Ref & Imp
25,000 Par Dona Ana Cnty N Mex Gross
Rcpt Wtr Sys
15,000 Par Houston Tex Arpt Sys Rev
Sub Lien
25,000 Par Houston Tex Indpt Sch Dist G
O Sch
15,000 Par Killeen Tex Ctfs Obli
10,000 Par Texas Pub Bldg Auth Bldg
Rev Bldg Rev
15,000 Par Texas Southn Univ Rev Impt
Bds
15,000 Par University N Mex Univ Revs
Sub Lien
Total
Goals
Difference
VIII.
869791 v1
Credit Shelter
Trust
Allocation
Value
2,945
1,207
1,947
128
531
10,862
CST Appreciation/
Depreciation
626
138
417
42
93
(294)
14,684
140
10,384
(135)
14,980
244
10,202
(315)
14,657
(31)
15,431
(101)
5,134
(148)
25,978
(1,456)
15,093
(289)
25,615
(1,003)
15,029
11,241
(11)
(311)
15,029
(278)
15,134
(107)
1,738,043
1,738,195
(152)
209,490
209,544
(54)
Reconciliation. The following chart illustrates the reconciliation of the distributions of the Estate:
J-15
Chapter 16
CHART NO. 8 – RECONCILIATION
DISTRIBUTION
Probate property outright to Mrs. C
Non-Probate property to Mrs. C – See Chart No. 2
Probate property to QTIP Trust – See Chart No. 6
Probate property to Credit Shelter Trust – See Chart No. 7
(Expenses)
TOTALS
FUNDING DATE
VALUE
180,17237
447,76938
2,299,456
1,738,043
45,000
4,710,440
These allocations result in a slight overfunding of the QTIP Trust at the expense of the Credit Shelter Trust.
The allocations, however, avoid capital gains on the distributions to both trusts.
IX. Funding of Probate Gifts Outright to Mrs. C. The Executor has distributed the Probate assets given
outright to Mrs. C in the following manner:
1.
Residence, __________. The Executor has executed a special warranty distribution deed of the
Estate’s former community property one-half interest in the home to Mrs. C, a filed copy of which is
attached at Tab D.
2.
Personal effects, household goods and furnishings. Mrs. C has possession of these assets, and no
formal documentation is required.
3.
Four automobiles. Mrs. C has taken the steps necessary with the State of Texas to transfer the
Certificate of Title in each automobile to her name.
X. Funding of the Gift to the QTIP Trust. Mrs. C, as Trustee of the QTIP Trust, has opened the following
accounts on behalf of the Trust:
1.
An account at Merrill Lynch in the name of Mrs. C, Trustee of the Mrs. C QTIP Trust, account
number __________. All of the securities and cash allocated to the QTIP Trust with the exception of
the Vanguard/Wellington Fund mutual fund shares and the items the Trustee distributed to Mrs. C
before funding were transferred to this account.
The Executor obtained a federal tax identification number for the Mrs. C QTIP Trust, which is __________.
Attached at Tab E is a copy of the IRS Notice of provisional Employer Identification Number and the Form SS-4
Application for EIN.
The Executor has also taken the following steps to transfer the assets and any proceeds listed in Chart No. 6 to
the QTIP Trust:
1.
72 Shares of Vanguard/Wellington Fd. The Executor will request that the mutual funds be reissued
in the name of Mrs. C, Trustee of the Mrs. C QTIP Trust.
2.
308.86 Shares of Vanguard/Wellington Fd. The Executor will request that a new account be
opened in the name of Mrs. C, Trustee of the Mrs. C QTIP Trust, and that the shares be transferred to
the account.
37
These assets were not revalued because they were not available for funding the QTIP Trust and were therefore not subject to
the fairly representative funding standard.
38
These assets also were not revalued for the same reasons as above. Also, the total includes the date of gift value of Mr. C’s
interest in the Unitrust of $376,835, because that is the amount that was includable in Mr. C’s gross estate. A marital deduction
was claimed based on the date of death value of Mr. C’s interest, which passed to Mrs. C under the terms of the trust in the
amount of $154,774.
869791 v1
J-16
Chapter 16
3.
Idaho Real Estate (all parcels). The Executor has executed two special warranty distribution deeds
of the Estate’s former community property one-half interest in the real estate to Mrs. C, Trustee of
the Mrs. C QTIP Trust, copies of which are attached at Tab F. The deeds have been submitted for
filing in the records of Valley County, Idaho.
4.
DiscoverBank CDs. The Estate only has an undivided interest in the three DiscoverBank CDs. If
the Executor attempts to divide the CDs before they mature, both the Estate and Mrs. C will incur
penalties for early withdrawal. Accordingly, the Executor will wait to fund the QTIP Trust with the
CDs until each matures as follows:

On October 5, 2007, the Executor will distribute $54,917 from account #__________ to the QTIP
Trust.

On December 12, 2007, the Executor will distribute $44,340 from account #__________ to the
QTIP Trust.

On September 7, 2008, the Executor will distribute $48,680 from account #__________ to the
QTIP Trust.
XI. Funding of the Gift to the Credit Shelter Trust. Mrs. C, as Trustee of the Credit Shelter Trust, has
opened the following accounts on behalf of the Trust:
1.
An account at Merrill Lynch in the name of Mrs. C, Trustee of the Mrs. C Credit Shelter Trust,
account number __________. All of the securities and cash allocated to the Credit Shelter Trust have
been transferred to this account.
The Executor obtained a federal tax identification number for the Mrs. C Credit Shelter Trust, which is
__________. Attached at Tab G is a copy of the IRS Notice of provisional Employer Identification Number and the
Form SS-4 Application for EIN.
XII. Collection of Non-Probate Assets. Mrs. C, as sole beneficiary, collected the benefits under the two life
insurance policies on Mr. C’s life. No action was necessary regarding the 1999 Charitable Remainder Unitrust.
The undersigned have read, approved and accepted this Memorandum on the dates set forth next to their
respective names, effective as of March 31, 2007.
869791 v1
J-17
Chapter 16
Exhibit K – Sample Closing Memorandum
706 & QDOT Trust
EFFECTIVE AS OF OCTOBER 31, 2007
This Estate Distribution and Closure Memorandum (“Memorandum”) has three primary purposes. First, the
Memorandum documents the distribution of the assets of the Estate of _______, Deceased (“Estate”) to the devisees
under the Last Will and Testament of _______ (“Will”). Second, the Memorandum documents distribution of nonprobate assets (i.e., those assets that passed outside the Will). Third, the Memorandum documents the funding of the
_______Qualified Domestic Trust established by the Co-Executors of the Estate and the primary beneficiary of the
Estate.
I.
Family Information.
A.
Deceased. _______ (“Mr. D”) died in El Paso County, Texas on _______, 2005. Mr. D was a citizen
of the United Mexican States, but was a permanent resident of the United States beginning in 2002.
B.
Survivors. Mr. D was survived by his wife, Mrs. D (“Mrs. D”), his daughter, _______, and his
daughter-in-law, _______, and several grandchildren and great grandchildren. Mr. D’s only son, _______, was
predeceased.
A.
Will. Mr. D executed his Will on _______, 2003. A copy of the Will is attached at Tab A. He did
not execute any codicils. The Will was admitted to probate on February 21, 2006, in the case styled In the Matter of
the Estate of _______, Deceased, Cause Number _______, in the Probate Court of El Paso County, Texas.
B.
Co-Executors. The Court appointed _______ and _______, CPA, as Independent Co-Executors, to
serve without bond, on _______, 2006. The Co-Executors filed their respective oaths on the same date.
C.
Proceedings in Florida. Before his death, Mr. D owned an undivided one-half life estate interest in a
condominium located in Aventura, Florida. An affidavit authenticating a certified copy of Mr. D’s death certificate
has been filed in the county records of Miami-Dade County, Florida to establish the necessary chain of title for the
property. A copy of the affidavit is attached at Tab B.
A.
Gifts. The Will made the following three gifts to or for the benefit of Mrs. D, if she survived Mr. D.
1. All of Mr. D’s interest in any residence, all household goods, furnishings, personal effects and
automobiles. (Will, Part Two ¶ 1(a).)
2. All of Mr. D’s interest in any employee benefit plans owned by Mrs. D. (Will, Part Two ¶ 1(b).)
3. The residue (everything else) of the Estate. (Will, Part Two ¶ 1(c).)
B.
Payment of Debts and Taxes. The Will required that all debts and taxes be paid out of the residue of
the estate. (Will, Part Three ¶ 4.) The Estate had debts but owed no taxes. Therefore, the value of the gift to Mrs. D
of the residue will be reduced only by the amount of debts and administration expenses.
IV. Form 706 Estate Tax Return and Date of Death Values.
The Co-Executors timely filed a Form 706 United States Estate (and Generation-Skipping Transfer) Tax
869791 v1
K-1
Chapter 16
Return (“Return”) on _______, 2007. The Return reported a total gross estate based on date of death values equal to
$3,713,168. The Return also indicated that no estate taxes were due because of a combination of (i) the estate tax
exemption left remaining in Mr. D’s estate; (ii) deductions for expenses; and (iii) the Co-Executors’ election to treat
Mrs. D’s transfer of certain properties to the Qualified Domestic Trust, dated _______, 2007 (“QDOT Trust”), as
qualified domestic trust property under Code Section 2056A.
A copy of the Return, with schedules, is attached at Tab C. On August 29, 2007, the IRS accepted the
Return as filed and issued an Estate Tax Closing Document, a copy of which is attached at Tab D.
The total gross estate reported by the Return included both probate assets (i.e., property that passed by the
Will) and non-probate assets (i.e., property that did not pass by the Will). Only probate assets are available to fund
the gifts under the Will.
A.
Probate Assets. The probate assets reported on the Return include the following:
CHART NO. 1 – PROBATE ASSETS REPORTED ON RETURN
RETURN
SCHEDULE
B
B
C
C
F
F
F
500,000 Par State of Israel Bond and accrued
interest
250,000 Units Government of Israel Variable
Libor Note and accrued interest
JP Morgan Chase Bank - Checking Account No.
_______
JP Morgan Chase Bank - Savings Account No.
_______
Assignee interest in 49% limited partnership
interest in _______ Partnership, Ltd.
Assignee interest in 1% general partnership
interest in _______ Partnership, Ltd.
Household goods and personal effects
TOTAL
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$252,292.00
$127,024.00
$89,380.00
$12,930.00
$2,570,000.00
$57,700.00
$2,500.00
$3,111,826.00
All of the probate assets reported on the Return were the community property of Mr. D and Mrs. D. With the
exception of the assignee interests in _______ Partnership, Ltd., the Return reported the date of death value for the
entire community property interest in each asset. The Estate’s interest in each asset, however, was one-half of the
value reported on the Return. The values reported in Chart No. 1, above, reflect only the Estate’s interest in the
properties.
B.
Non-Probate Assets. Non-probate assets reported on the Return include the following:
CHART NO. 2 – NON-PROBATE ASSETS REPORTED ON RETURN
RETURN
SCHEDULE
F
F
F
G
869791 v1
Hartford Annuity Contract No. _______;
Beneficiary – Mrs. D
Beneficiary - Mrs. D
One-half undivided life estate in Florida
K-2
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$99,420.00
$82,641.00
$58,180.00
$337,500.00
RETURN
SCHEDULE
Chapter 16
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
Condominium, _______, Aventura, Florida;
Remaindermen - _______ and heirs of _______
$577,741.0039
TOTAL
Again, the non-probate property reported on the Return was the community property of Mr. and Mrs. D. The
values reported in Chart No. 2, above, reflect only the Estate’s interest in such property.
C.
Estate Tax Exemption and Marital Deduction. In 2005, the year of Mr. D’s death, the applicable
exemption from estate taxes was $1,500,000. Mr. D also made a taxable gift of $160,000 in 1992. A copy of the
1992 Form 709 gift tax return, which was not filed until after Mr. D’s death, is attached at Tab E. Because Mr. D
was neither a United States citizen nor a United States resident at the time, however, Mr. D had no exemptions
available for the gift tax. The 1992 gift therefore did not affect Mr. D’s estate tax exemption. In 2005, and before
his death, Mr. D made a $1,000,000 taxable gift to his daughter, _________. A copy of the 2005 Form 709 is
attached at Tab F.40 The 2005 gift used up $1,000,000 of the available exemption from estate taxes. Accordingly,
Mr. D had only $500,000 of the exemption amount left at the time of his death.
Schedule M-1 reported the allocation of the remaining exemption amount of $500,000. The Co-Executors
allocated $337,500 to the life estate in the Florida condominium, leaving $162,500 of the exemption available for
other assets. The Co-Executors then allocated Mr. D’s remaining exemption to the assets that Mrs. D received
outright and did not assign to the QDOT Trust valued at $231,299. As will be explained below in Section VI, the
Co-Executors also allocated expenses and debts totaling $106,697.00 to the gift to Mrs. D. The result was that only
$124,602 of the remaining exemption amount was required to exempt the assets passing outright to Mrs. D from the
estate tax. The following chart lists the properties received outright by Mrs. D.
CHART NO. 3 – ASSETS RECEIVED BY MRS. D
250,000 Units Government of Israel Variable Libor Note and
accrued interest
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$127,024.00
100% of Hartford Annuity Contract No. __________;
$99,420.00
2.85% of Hartford Annuity Contract No. __________;
$2,355.00
Household goods and personal effects
SUBTOTAL
$2,500.00
$231,299.00
Less debts and administration expenses
TOTAL
($106,697.00)
$124,602.00
The Estate is entitled to a deduction for the value of all assets that pass to a United States citizen spouse. If
39
If one adds the total value of the probate assets plus the total value of non-probate assets, the sum is only $3,689,567. This
total is $23,600 less than the value of the gross estate reported on the Return of $3,713,168. The reason for the difference is that
Code section 2035(b) requires the inclusion of any gift taxes for taxable gifts made within three years of death. Mr. D made a
taxable gift in 2005, before his death, which resulted in a $23,600 gift tax. This item is reported on Schedule G of the Return.
40
At the time the 2005 709 was filed, the Co-Executors did not know Mr. D had made the 1992 taxable gift and reported that no
taxes were due. Because of the manner in which gift taxes are calculated under the applicable Code sections and regulations,
which is based on a sliding scale, the 1992 taxable gift resulted in gift taxes in the amount of $23,600 being owed on the 2005
gift. Counsel for the Co-Executors have advised them that they should file an amended 2005 709 and pay the taxes due to stop
interest and penalties from accruing.
869791 v1
K-3
Chapter 16
the spouse is not a United States citizen, the Estate may receive a deduction for all assets that either pass directly to
or are assigned by the surviving spouse to a qualified domestic trust under Code section 2056A. Schedule M-1 of the
Return also reported the amount claimed for the marital deduction as $3,120,767 based on Mrs. D’s irrevocable
assignment of certain assets or their sales proceeds to the QDOT Trust, which assets or proceeds are listed in the
following chart. A copy of the QDOT Trust is attached at Tab G.
CHART NO. 4 – ASSETS ASSIGNED TO QDOT TRUST
DATE OF
DEATH VALUE OF
ESTATE'S INTEREST
$2,570,000.00
Assignee interest in 49% limited partnership interest in
_______Partnership, Ltd.
Assignee interest in 1% general partnership interest in
_______Partnership, Ltd.
500,000 Par State of Israel Bond and accrued interest
$57,700.00
$252,292.00
JP Morgan Chase Bank - Checking Account No. _______
$89,380.00
JP Morgan Chase Bank - Savings Account No. _______
$12,930.00
100% of Hartford Annuity Contract No. _______;
97.15% of Hartford Annuity Contract No. _______;
TOTAL
$58,180.00
$80,286.00
$3,120,768.00
Through a combination of the remaining estate tax exemption ($500,000), deductions for expenses
($106,697) and the marital deduction ($3,120,768), no estate taxes were owed on the reported estate value of
$3,713,168.
V. Transactions, Distributions and Dispositions during Administration. During the administration of the
Estate, the following assets were disposed of as indicated:
CHART NO. 5 – TRANSACTIONS DURING ADMINISTRATION
ACTION
GROSS PROCEEDS
OF ESTATE’S
41
PROCEEDS
DEPOSITED INTO
INTERESTS
500,000 Par State of Israel
Bond and accrued interest
250,000 Units Government of
Israel Variable Libor Note and
accrued interest
Hartford Annuity Contract No.
_______; Beneficiary - Mrs. D
Matured on
09/30/06
Matured on
10/01/06
Liquidated on
01/10/06
Liquidated on
01/10/06
Liquidated on
01/10/06
41
$252,292
Chase Bank Acct.
No. _______ (“Chase)
$127,024
Chase
$99,420
Chase
$82,641
Chase
$58,180
Chase
For administrative convenience, the gross proceeds on the chart do not include increases for accrued income or capital gains
for the reason that same necessarily belong to Mrs. D. The regulations under Code § 2056A require that any income of a QDOT
trust be distributed to the surviving spouse. Further, under the Texas Principal and Income Act (“Act”), which governs the
QDOT Trust (See Art. VII, Par. 7.2(e) of the QDOT Trust), the Trustee has the discretion to allocate capital gains to income.
The Act also governs allocation of income of an Estate. TEX. PROB. CODE § 378B. As Mrs. D was the only Estate beneficiary,
all income is to be allocated to her.
869791 v1
K-4
Chapter 16
VI. Estate Administration Income and Expenses.
The Will directs that debts and administration expenses be paid out of the residue of the estate. (Will, Part
Three, ¶ 4.) The Will does not direct the allocation of income the estate generates during administration. Texas law,
however, provides the necessary direction for the allocation of estate income. The net income of the estate is to be
determined in accordance with the Texas Principal and Income Act, TEX. PROP. CODE Ch. 116, and distributed as
follows:


TEX. PROB. CODE §§ 378B(b), (c), (d). The executor is granted discretion to allocate the income in a fair and
expense. Id. § 378B(h). As Mrs. D was the only recipient of gifts from the Estate, all income will be allocated to
her, individually.
The Estate’s debts, as claimed on the Return, totaled $65,600. The debts came from unpaid gift taxes for
taxable gifts made in 1992 and 2005. The administration expenses deducted on the Return totaled $41,097. The
debts and expenses are shown on the following chart.
Debts
1992 Gift Tax
2005 Gift Tax
SUBTOTAL
AMOUNT
$42,000.00
$23,600.00
$65,600.00
Accounting Fees
$0.00
Attorneys' Fees
$30,728.00
Funeral Expenses
$4,130.00
Other Expenses Claimed on Return
$6,239.00
SUBTOTAL
$41,097.00
TOTAL
$106,697.00
Such debts and expenses totaling $106,697 must be charged against the residue of the estate, which is the gift to
Mrs. D.
VII. Reconciliation. The following chart illustrates the reconciliation of the distributions of the Estate:
CHART NO. 7 – RECONCILIATION
DISTRIBUTION
Probate and non-probate property outright to Mrs. D (less
debts and expenses) - See Chart No. 3
Probate and non-probate property assigned to QDOT Trust See Chart No. 4
Subtotal to or for Benefit of Mrs. D
869791 v1
K-5
DATE OF
DEATH VALUE
$124,602.00
$3,120,768.00
$3,245,370.00
Chapter 16
DISTRIBUTION
Life Estate to Remaindermen
Subtotal of All Distributions
DATE OF
DEATH VALUE
$337,500.00
$3,582,870.00
Debts and Expenses
$106,697.00
Property brought back into estate under 2035(b)
Total
Gross Estate per Return
Difference
$23,600.00
$3,713,167.00
$3,713,168.00
($1.00)42
VIII.
Funding of Assets Outright to Mrs. D. The Co-Executors have distributed the assets (both probate
and non-probate) given outright to Mrs. D in the following manner:
1. Personal Effects, Household Goods and Furnishings. Mrs. D has possession of these assets, and no
formal documentation is required.
2. Proceeds from Sale of Bonds and Annuities. The account into which the proceeds from the sale of the
250,000 units Government of Israel Note and the Hartford Annuities listed in Chart No. 3 were placed in
an account in the name of Mrs. D. No further action was necessary to distribute such proceeds to Mrs.
D.
IX. Funding of the Transfers to the QDOT Trust. Mrs. D irrevocably transferred the assets listed below to
_______, CPA, and _______ Bank, as co-Trustees of the QDOT Trust, as follows:
2.
Assignee Interest in 50% Limited Partnership Interest in _______ Partnership, Ltd. The terms of
_______ Partnership, Ltd.’s Partnership Agreement specified that the death of a general partner
resulted in any general partnership interest held by the decedent being transformed into an assignee
interest in a limited partnership interest of the same percentage. Accordingly, Mr. D’s 1% general
partnership interest became an assignee interest in a 1% limited partnership interest, and the Estate
therefore held only an assignee interest in a 50% limited partnership interest. Mrs. D and the CoExecutors executed two separate Irrevocable Assignments of this interest to the QDOT Trust on
February 13, 2007, effective as of January 31, 2007. Copies of the assignments are attached at Tabs
H and I, respectively.
3.
Bonds, Bank Accounts and Annuities Listed in Chart No. 4. Mrs. D and the Co-Executors also
executed separate Irrevocable Assignments of the proceeds from the sale of these assets to the
QDOT Trust on February 13, 2007, effective as of January 31, 2007. Copies of the assignments are
attached at Tabs J and K, respectively. As indicated on Chart No. 5, each of these assets was
liquidated. The total proceeds were $493,067. Documentation of funding of the QDOT Trust on
May 8, 2007 with such proceeds is attached at Tab L.
The Co-Trustees obtained a federal tax identification number for the QDOT Trust, which is _______.
Attached at Tab M is a copy of the IRS Notice of Employer Identification Number.
X. Collection of Non-Probate Assets.
Life Estate. The Co-Executors filed Mr. D’s death certificate in Miami-Dade County, Florida to establish
the necessary chain of title after Mr. D’s life estate expired.
XI. Payment of Debts. The Co-Executors have paid the debt associated with the 1992 gift taxes owed, as
evidenced by a check dated October 19, 2007 and made payable to the United States Treasury, which is attached at
42
The dollar difference is caused by a rounding error related to the division of community property assets into the Estate’s
interest.
869791 v1
K-6
Chapter 16
Tab N. They have not received a response from the IRS regarding their request for a waiver of penalties and interest.
They will take appropriate measures once the IRS responds to the request. The Co-Executors intend to file an
amended 2005 709 Gift Tax Return and to pay the $23,600 in gift taxes due to avoid the accrual of further penalties
and interest.
XII. Acceptance of Memorandum. The undersigned have read, approved and accepted this Memorandum on
the dates set forth next to their respective names, effective as of October 31, 2007.
869791 v1
K-7

DRAFTING FOR THE SETTLEMENT OF ESTATES AND TRUSTS R. Glenn Davis

Transcription

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