For some reason, we estate planning lawyers like to use acronyms for the weird projects that we work on.  I frankly think its unfair to a client when we go around spouting off acronyms like GRAT, POA, FLP, IDGT, etc, with the expectation that our clients understand us. 

So, from time to time, I’ll write about some of these acronyms so that you’ll be able to use them at cocktail parties and impress your friends!  Or maybe bore them, who knows?

The first acronym to consider is the “GRAT” or Grantor Retained Annuity Trust.  A GRAT is a trust arrangement in which you transfer property to a trust, while retaining the right to receive an income stream from the trust for a number of years. After the term expires, the remainder of the GRAT assets, if any, passes to your beneficiaries (either outright or in trust for a specified period of time). Under this type of arrangement, the value of the gift to your beneficiaries for transfer tax purposes is determined after considering the value of payment stream retained by you. Assuming that the assets used to fund the GRAT appreciate at a rate greater than the assumed rate used to value the gift interest, you will, in effect, be able to transfer assets to your family without the imposition of an estate or gift tax.

It should be noted that a potentially significant drawback to a GRAT is that if you do not survive the trust term, the entire value of the trust’s assets (including the appreciation) could be included in your estate for estate tax purposes. It is as though you had not created the trust in the first place. Notwithstanding this possibility, the use of a GRAT to transfer wealth at little or no transfer tax cost makes them a great tool for the right situation.

In most situations, gifts or bequests to a spouse is not subject to a transfer tax, since the Internal Revenue Code gives us an unlimited marital deduction for those types of gifts. This means that there is no tax on any assets  from you to your spouse, assuming your surviving spouse is actually your legal spouse and a US citizen at the time of your death.

However, unlimited amounts may not be left to a non-citizen spouse because the federal government is concerned that in the event that a surviving spouse were to receive the funds without any transfer tax, he or she could leave the country and no tax could be collected at that spouse’s death. As a result, there are limitations on the amount that a non-citizen surviving spouse can receive without a transfer tax consequence.

Fortunately, the Internal Revenue Code offers an opportunity to leave unlimited funds in a special tax trust for a non-citizen spouse that will not immediately result in a transfer tax.  This tyep of trust is called  a Qualified Domestic Trust ( or “QDOT”).   

If your planning is not completed before death, depending on the size of your estate, a significant tax may be due. In this case, a non-citizen spouse may need to petition the immigration service to become a U.S. citizen. If this occurs prior to the filing of the estate tax return (due 9 months from date of death), you may be able to defer this tax liability until the surviving spouses’ death under the unlimited marital deduction rules.

Alternatively, a non-citizen spouse could elect to petition the local probate court to request that it “amend” an estate plan so that it qualifies under the QDOT rules.  This, of course, is not an option if no planning was contemplated to begin with, but in the event your estate plan is complete, but void of this necessary language, then petitioning a court may be a worthwhile option.

We spend 20-30% of our time working on probate and trust administration matters.  Whenever a deceased individual owned life insurance, we have come to learn that we need to also check for stock that he may have owned in the insurance company that issued the policy.

Some insurance companies, such as Northwestern Mutual, are “mutual companies”, which means that they are owned by their policyholders.  Other companies, such as MetLife, are “stock companies”, which means that they are owned by stockholders.  Many of these stock companies, though, were at one time mutual companies, and they demutualized to become stock companies.

Generally, when a mutual company becomes a stock company, it will issue stock to its policyholders.  That way, they will remain the owners of the company once it becomes a publicly traded stock company.  What makes this interesting is that when someone has a small policy, they might be given cash for their ownership interest or a small number of shares of stock.  If that person gets stock, it sometimes is forgotten until after that person has died.

For example, I am working with a client whose mother died several years ago.  My client’s mother owned an old MetLife insurance policy.  When she died, the policy proceeds were collected, and no further thought was given to it until recently.  My client received a letter from the State of New Jersey that indicated that MetLife had deposited about 20 shares of stock with the State’s  Unclaimed Property Division in her mother’s name.  It turns out that when MetLife demutualized several years ago (but AFTER her policy was issued), she was given some stock in the company.  Since the number of shares were so small, she forgot about them as did her family after her death.  We are now in the process of trying to retitle the stock, which is no always cost effective. 

So, what’s the lesson?  If you have any life insurance (or disability insurance for that matter), take a few minutes to find out if the company that issued your policy was a mutual company when it was issued and whether it demutualized after the fact.  If so, then you should check if you own any stock in the company, and if you do, then you incorporate it into your estate plan so that your family can receive at death without much difficulty.

Of course, if you are administering an estate, then you, too, have a job to do.  If insurance is involved, spend the time necessary to determine if any insurance stock is floating around.  It will be a lot easier and certainly more cost effective to spend the time researching this possibility then it would be to discover it later after the estate is closed.