Almost every estate is comprised of tangible personal property (TPP) that will be subject to division and distribution. Some TPP may be distributed by list disposition. Some may be donated under a charitable bequest. Other items may be divided pursuant to a general bequest among a class of beneficiaries. Still others may be sold with proceeds distributed as part of the residue. Regardless of the devise, the value, methodology, mechanism and power to resolve disputes as well as the potential tax consequences attendant to the TPP merit consideration. Even the location of the bequest and whether it’s considered a specific bequest or a general bequest can have significant implications as to whether the bequest will ultimately be satisfied, especially if the estate is illiquid, or the potential for exercise of a statutory election exists, because of the order that bequests abate.
Battles over TPP have made the headlines. Remember the battle over Robin Williams’ personal belongings? But, these battles happen all too frequently in estates both big and small. Hurt feelings created during the division of the TPP and inter-family litigation over an estate can cause irreparable rifts in a family. Not every battle can be avoided, but planning and forethought may avoid some.
Consider the following illustrative scenarios.
Second Marriage
H and W’s estate plan leaves the TPP to the survivor, subject to list disposition. No list is ever prepared or found. H survives and remarries. He’s in possession of W’s jewelry, family heirlooms, family photos and historical family documents. H dies survived by W2. H’s estate plan continues the same provisions (all TPP to W2, subject to list disposition and, if she doesn’t survive, equally to his children who survive him). The children from H’s first marriage may be upset to learn that W2 is receiving items that had been their mother’s or accumulated during H’s marriage to W. Things can be further complicated if W2 and the children aren’t on good terms. Even if H specifies that he wants certain items to go to the children, W2 may claim H gifted some of those items to her during their marriage and argue that those specific bequests should be adeemed because they were no longer H’s.
How to avoid? Consider a specific bequest of sentimental items that one spouse may wish to keep in the family on the death of the first spouse. W could have provided that some of the items go to the children on her death. Clearly, a discussion at the planning stage might identify issues so that proactive planning may avoid future disputes.
Item No Longer Owed at Death
Grandma prepares an estate plan and specifically provides for certain special items to go to each grandchild. Grandma thoughtfully tried to provide each grandchild with an item that had specific importance to the family’s history. The balance of her TPP is to be divided equally among her then-living children. Over time, she starts to declutter or downsize. She gives items away. She forgets that she listed that items are designated to go to different individuals in her estate plan. By the time grandma dies, some but not all of these special items have been gifted away to grandchildren different from those delineated in the estate plan. While some grandchildren still receive special items at her death, others receive nothing. Hard feelings arise.
The children also fight over what “equal” means. Is it equal in value or equal in number of items?
How to avoid? Clear drafting might avoid these battles. We generally reflect that an item specifically devised, but that’s no longer owned at death, lapses. Consider including a provision that permits a grandchild to select another item of sentimental value (not to exceed $X in value) if her bequest would otherwise adeem, and specify how equality is to be achieved.
Disproportionate Distribution
Dad has a valuable art collection. When he prepares his estate plan, he provides for specific devises of various paintings among his children. Other works are directed to be sold or donated. The residue is to be equally divided. Initially, he thought each child was getting art that was approximately equivalent in value. Over time, some works appreciated more than others such that a significant disparity in the values of those works (perhaps in the millions) exists by the time he dies. What if, in addition to the disparity in value, dad’s will indicates that all taxes are to be paid from the residue. Not only will some children receive a disproportionate distribution based on the value of the art, but also children who are already receiving less will also suffer the tax consequences of the disparity.
How to avoid? Perhaps a valuation and equalization clause might soften the blow and avoid an unintended disproportionate division of his estate among his children. When valuable tangible property or a disproportionate division may occur, consider whether an equitable apportionment clause or use of the state’s default apportionment provisions results in a more equitable distribution than a “pay the taxes from the residue” would provide. We generally exempt generation-skipping transfer tax out of apportionment provisions—allocating the tax consequences related to tangible personal property over a specified value might also be appropriate in some circumstances.
Bequest Restrictions
Joe is a professor in a university art department. He has no close living relatives. He has passionately collected pottery. He wants to leave his vast collection to the university, but also wants to restrict the bequest to display in the university’s museum. But, the museum may not want to accept the gift with those limitations.
How to avoid? As part of the planning process, it’s important for Joe to discuss his plans with the university. It may not want all of the collection and may have no desire to display pieces it accepts. The university’s position may affect Joe’s plan. In fact, after speaking with the university, Joe decides to limit the bequest to certain pieces over which an agreement is reached. Joe is then able to make other plans for the remaining pieces.
Issues With “Collections”
Mary is a “collector.” Some of what Mary collects is valuable; some isn’t. Some items have greater value as a “collection” but are worth less on a piecemeal basis. Mary’s home is packed to the brim with items, and her sister, Sue, who’s nominated to administer her estate, has always thought Mary’s collecting habits were just an absurd obsession and that she has nothing of real value. Sue lacks knowledge of what’s valuable, and to her, it all looks like items to sell at a garage sale. Mary’s children live out of state; some live out of the country. The plan permits each child to select TPP on a round-robin basis. As to items not specifically selected, Sue is given discretion to distribute the TPP in kind or otherwise sell the items and distribute the proceeds equally among Mary’s children. The plan also provides for Sue to pay the storage and shipping costs associated with TPP distributed in kind as an administrative expense. Sue is tasked with traveling to Michigan to clean out the house and get it on the market quickly. It could be helpful for Mary to leave Sue a binder, or other organized documentation, that identifies items of value and their provenance, so they aren’t accidentally disposed of at garage sale prices. Mary’s son, Mark, selects the baby grand piano he played as a child. Mary’s daughter, Jennifer, selects the etching that always hung over the mantle. Mary’s son, Chris, selects a miniature carving. All these items should be insured, but it’s not clear who’s responsible for bearing the cost of insurance during the shipping or extended storage process.
How to avoid? It would be helpful if the estate-planning documents indicate who’s to bear the costs of insuring the items. Because Mark is career army and stationed overseas, the cost of shipping the piano to him and/or insuring it and keeping it in a humidity-controlled storage unit until he ultimately (if ever) returns stateside, can be significant (especially given the overall size of the estate). The etching turns out to be a Rembrandt, and special packing, storage and insurance is required to protect the item in transport from Michigan to Jennifer in California. Chris is an executive who currently lives in England, and it turns out the little carving is ivory, and the true provenance of the carving can’t be established. Export restrictions on ivory may present a problem in legally getting the item to Chris. Consideration of these issues may have resulted in Mary providing necessary information and drafting that might help Sue fulfill her fiduciary responsibilities in administering the estate.
Obstacles to Estate Administration
Max is a survivalist who’s gone on numerous big game African hunting safaris. When he dies, his estate is comprised of a large collection of taxidermy, guns (both historical and working), ammunition, knives and tribal art. Max nominates his son, Sam, to administer his estate. Sam has a felony conviction. Max has been estranged from his daughter, Julie, since Max and her mother divorced 30 years earlier. Julie and Sam haven’t spoken since Sam went to prison. Since his release from federal prison, Sam has been a model citizen. Both children live in a different state than where Max resided at the time of his death. Max didn’t consider that Sam won’t be able to possess the guns and that some of the items may be otherwise protected or transfer restricted. These issues might impair the estate’s ability to obtain full fair market value or impair Sam’s ability to properly administer the estate or even receive items left to him.
How to avoid? A review of options during the planning process and as circumstances change can be extremely important. A public administrator or a mechanism for the appointment of an independent fiduciary may be important to the administration of this estate.
Importance of Recordkeeping
Frank has been an ardent art collector. His collection spans many genres, and significant portions of his collections are on loan to a variety of prestigious galleries and museums. He also has valuable art in his residence and multiple vacation properties, while other pieces are in storage, and some have been entrusted to private galleries and art dealers for consignment sale. Frank’s estate plan contains a number of specific charitable bequests, but not all of the art is to be donated. This can create confusion when it comes time to administer the estate.
How to avoid? During the planning process, it’s important to advise Frank of the need to keep records of where all of his art is located, maintain information regarding provenance, perhaps list the reputable dealers and experts he’s dealt with and regularly update values. Maintaining adequate insurance and abiding by the terms of those policies remain important throughout. When it comes to disposing of the art, it will be important to have knowledgeable advisors involved. Because Frank has a taxable estate, art valued at over $50,000 may need to be submitted to the art advisory panel for valuation, in addition to obtaining an independent valuation. Disposing of all pieces of a certain genre, or by a single artist, may depress the value ultimately attained. Selling items through a private gallery may place the art at risk if the gallery goes bankrupt and a Uniform Commercial Code filing reflecting the estate’s ownership of the art isn’t on file. Placing the art with a reputable auction house will subject the proceeds to a fee that may not be deductible if the need to sell the art wasn’t established. Therefore, rather than giving the fiduciary discretion as to which pieces the grantor desires to be sold following his death, a direction in the estate plan to sell certain pieces may assist in making the disposition costs a deductible expense when the need to sell isn’t otherwise necessary to provide liquidity to meet costs of administration.
Need for Inventory
Let’s add another layer of complexity to the scenario regarding Frank’s estate. At the time of his death, Frank is on his third marriage. At the time of his marriage to his third wife, Betty, he entered into a prenuptial agreement (prenup) that required he provide her with a bequest of $5 million and the right to reside in their primary residence for the balance of her life. It also provided her with the right to direct that the trustee sell the home and replace it with a home of equal or lesser value or simply not replace it at all. The home has been in Frank’s family for three generations. No right of sale or disposition was provided with regard to the tangible personal property located in the home. The prenup provided that Betty would have the right to continue to use the furniture and furnishings located in the home, subject to ordinary wear and tear. The home contains Ming dynasty pieces, valuable art hung on the walls, collectibles and items of sentimental value to the children of his first marriage. Betty won’t let the children ever come and visit. At Frank’s death, she claims some items in the home are hers (not Frank’s) or jointly acquired such that she has survivorship interests. Bills of sale and records of purchase don’t exist or have been destroyed. No itemization was ever prepared to reflect what was Frank’s, Betty’s or jointly acquired property. When Frank dies, various paintings have just been returned to the home from exhibition and are still in crates. Betty claims that under the terms of the prenup (and his estate plan that incorporated the terms of the prenup), all items in the home are to be part of her life estate interest (including the just returned/crated art) or are hers. A battle over Frank’s intent and her rights to the TPP located at the home ensues. The rift between her and the children naturally widens. Betty leaves her entire estate to her children. She acquires TPP of her own in the years following Frank’s death. When she dies, the trustee determines that Betty permitted her grandchildren to play with collectible Disney characters, and limbs have been torn off of several in the process of regular toddler play. Numerous items from Frank’s estate that were subject to Betty’s life estate are no longer located at the home. Betty’s son, who has a significant long-standing substance abuse problem, stole items or pawned them, and they can’t be located. Because police reports weren’t timely filed (as Betty didn’t want to get her son in trouble), the insurance refuses to pay.
How to avoid? Under these circumstances, providing a life estate may not have been prudent. Discussions on the front end, and along the way, may have identified concerns that could have been addressed while Frank was still alive. Otherwise, provision for regular inventorying, inspections and a mechanism to verify that items of value are maintained in a fashion that maintains value and permits continued insurance coverage may be important. Allocating the furniture and furnishings to a non-marital trust may preserve the marital deduction. Providing a mechanism to sell items, whether they be TPP or the house, to the residuary beneficiaries, perhaps via a right of first refusal, might help preserve items in the family while also protecting a marital deduction. Providing a requirement that family photos be duplicated can make sure some of these items are preserved for the family. A video or photo record of items in the home (and their condition) might also be helpful in identifying items, as will as an indication of who they belong to.
Dysfunctional Family
In Jack’s family, dysfunction with a capital “D” has been abundant. Jack can’t deal with it and believes less is best. His plan merely states that his personal belongings shall be divided among his children as they may agree (knowing that they never agree on anything but being unrealistically optimistic that they’ll be able to agree on the division of the items he leaves behind). He nominates his children, in order of age, to administer his estate. They can’t even agree on what’s meant by personal property (which can be more expansive, by definition, than TPP) or whether a collection represents a single item or each item in the collection is to be subject to separate selection.
How to avoid? Care in defining what’s intended can help reduce the acrimony and areas of dispute. Providing a mechanism, whether it be drawing straws to effectuate a round robin selection of property on a 1-2-3, 3-2-1 or 1-2-3, 1-2-3 basis, bidding and purchasing items out of the beneficiary’s residuary bequest, bidding with factiously allocated emotional points or leaving the selection of items to the sole discretion of the fiduciary (which will likely result in claims against the fiduciary under the circumstances presented), can provide extremely helpful direction. In this instance, less is simply less and may result in more acrimony and administrative expense when litigation over the division of the TPP ensues.
Wrongfully Retrieving Items
Marilyn’s children tell her items they want. At various times during her life, Marilyn tells different children they can have the same item when she dies. Before her body is cold and in the grave, John goes into the house to retrieve items he believes Marilyn wanted him to have. His sister, Joan, believes she was to receive those very same items. By the time she comes to town for the funeral, the items are gone. Can she prove they were still around when Marilyn died? John went in and retrieved the items before a personal representative was even appointed or a trustee accepted the nomination to act. This scenario happens all too often and can lead to family strife and even claims of conversion. John also took care of Marilyn during her final days. Out of gratitude she gave him items, but Joan wasn’t aware that she did so and believes John wrongfully took those items as well.
How to avoid? The ability to secure the home and eliminate access can be extremely important but not always possible. Documenting that items have been gifted during life can also be helpful.
Estate Enmeshed in Litigation
Mike is on his third marriage. His business interests are illiquid and speculative in nature. His business gambles have resulted in great success but not all interests permit his estate to defer taxes under an Internal Revenue Code Section 6166 election. His estate is enmeshed in litigation. He has valuable TPP, worth in the millions of dollars, some of which represents family heirlooms and items of sentimental value. His plan specifies that his children receive the bulk of his TPP items, but it may matter where that direction appears and whether the items are specified. In some jurisdictions, if the provision is contained under the general disposition of his TPP, it may not be considered a specific devise. His third wife also elects a large family allowance and exercises other statutory elections and attempts to select some of the items of import to the children to satisfy her elections, and the costs of administration and tax obligations are mounting such that the fiduciary needs to liquidate TPP to meet these obligations. Unless otherwise provided in the instruments, a statute may direct the order in which bequests will abate.
How to avoid? If a different order for abatement is desired and Mike wants to preserve the possible distribution of key items to his children, the estate-planning attorney may be able to create a different result by including specific provisions intended to draft around the statutory default abatement provisions or draft the bequest in a way that will qualify it as a specific devise to give the bequest a priority position.
Eliminating Points of Contention
In any event, securing all TPP, preparing thorough inventories, attempting to achieve consensus as to a mechanism for division (if none is specified in the governing instrument), considering apportionment clauses and properly valuing assets can all be steps toward eliminating points of contention in the division of TPP.
With disputes over the division of TPP reportedly ranking as one of the top three causes for disputes in the administration of a decedent’s estate, giving due regard to planning for its disposition merits taking the requisite time in the planning stage to garner an understanding of the client’s possessions, desires, family dynamics and issues that might arise in its management, division and disposition.