2017 ESTATE PLANNING AND PROBATE LAW SURVEY COURSE September 27-28, 2017 NC Bar Center Cary, NC. Table of Contents

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1 2017 ESTATE PLANNING AND PROBATE LAW SURVEY COURSE September 27-28, 2017 NC Bar Center Cary, NC Table of Contents I. NORTH CAROLINA LAW OF WILLS Jill L. Peters Kaess Wilmington EXECUTION AND PROBATE OF WILLS... I-1 Who May Make a Will... I-1 Testamentary Capacity... I-1 Types of Wills... I-1 Codicils... I-6 REVOCATION OF WILLS... I-6 Revocation by Written Instrument... I-7 Revocation by Physical Act... I-7 By Operation of Law... I-7 Revival of Revoked Wills... I-9 Lost Will... I-9 Dependent Relative Revocation... I-9 DOCTRINE RELATING TO WILLS... I-9 Incorporation by Reference... I-9 Acts of Independent Significance... I-9 Pourover of Probate Assets to Inter Vivos... I-10 DISTRIBUTION PROBLEMS AND WILL INTERPRETATION... I-10 Classification of Gifts under Will... I-10 Abatement... I-10 Ademption... I-10 Lapse... I-11 Exercise of Powers of Appointment... I-11 Construction of a Will... I-11 CONTRACT TO MAKE WILL AND JOINT WILLS... I-13 Contract to Make a Will... I-13 Joint and Mutual Wills... I-13 WILL CONTESTS... I-13 Procedure... I-13 MISCELLANEOUS DRAFTING ISSUES... I-14 EXHIBIT A... I-17 EXHIBIT B... I-19 II. NORTH CAROLINA UNIFORM TRUST CODE Rebecca L. Smitherman Winston-Salem INTRODUCTION...II-1 i

2 TABLE OF CONTENTS OF THE NORTH CAROLINA UTC CHAPTER 36C OF THE NORTH CAROLINA GENERAL STATUTES...II-2 ARTICLE 1 GENERAL PROVISIONS AND DEFINITIONS...II-9 Coverage...II-9 Key Definitions...II-9 Default and Mandatory Rules...II-10 Principal Place of Trust Administration...II-11 Nonjudicial Settlement Agreements...II-11 Rules of Construction...II-11 Insurable Interest of Trustee...II-11 ARTICLE 2 JUDICIAL PROCEEDINGS...II-11 Jurisdiction...II-11 Declaratory Judgment Act...II-12 Contested Trust Proceedings...II-12 Rules of Civil Procedure...II-13 Accounting to Clerk...II-13 ARTICLE 3 REPRESENTATION...II-13 Introduction...II-13 Effect of Representation...II-13 Specific Persons Who May Consent on Behalf of a Beneficiary...II-13 Virtual Representation...II-14 Requirement of No Conflict of Interest...II-14 Guardian ad Litem...II-14 ARTICLE 4 CREATION, VALIDITY, MODIFICATION, AND TERMINATION OF TRUST...II-15 Creation of Trusts...II-15 Modification or Termination of Trusts...II-16 Analysis of the Modification, Termination and Decanting Statutes...II-17 Modification or Termination of a Non-Charitable Trust by Consent...II-17 Modification or Termination Because of Unanticipated Circumstances or Inability to Administer Trust Effectively...II-20 Modification or Termination of an Uneconomic Trust...II-21 Reformation of a Trust to Correct Mistakes...II-21 Modification or Termination of a Trust to Achieve Settlor s Tax Objectives...II-21 Trust Decanting Compared...II-22 Combination or Division of Trusts...II-23 ARTICLE 4A TAX STATUS OF CHARTIABLE TRUSTS...II-23 ARTICLE 4B CHARITABLE REMAINDER TRUST ADMINISTRATION...II-23 ARTICLE 5 CREDITOR CLAIMS; SPENDTHRIFT AND DISCRETIONARY TRUSTS...II-23 Rights of Beneficiary s Creditor or Assignee...II-23 Spendthrift Provision...II-24 Exceptions to Spendthrift Provision...II-24 Discretionary Trusts; Effect of Standard...II-25 Creditor s Claim against Settlor...II-26 ii

3 Overdue Distribution...II-26 Personal Obligations of Trustee...II-26 Protective Trusts...II-26 ARTICLE 6 REVOCABLE...II-27 Capacity of Settlor of Revocable Trust...II-27 Revocation or Amendment of Revocable Trust...II-27 Exercise of Settlor s Powers with Respect to Revocable Trust by Agent or Guardian...II-27 Limitation on Action Contesting Validity of Revocable Trust; Distribution of Trust Property...II-27 Failure of Disposition of Property of a Trust by Lapse or Otherwise...II-28 Revocation of Provisions in Revocable Trust by Divorce or Annulment; Revival...II-28 Modification or Termination of a Revocable Trust...II-28 ARTICLE 7 OFFICE OF TRUSTEE...II-28 Accepting or Declining Trusteeship...II-29 Trustee s Bond...II-29 Cotrustees...II-29 Vacancy in Trusteeship...II-30 Resignation of Trustee...II-30 Removal of Trustee...II-30 Deliver of Property by Former Trustee...II-30 Compensation of Trustee...II-31 Reimbursement of Expenses...II-31 ARTICLE 8 DUTIES AND POWERS OF TRUSTEE...II-31 Duty to Administer Trust...II-31 Duty of Loyalty...II-31 Key Conflict of Interest Rule...II-32 Impartiality...II-33 Prudent Administration...II-33 Cost of Administration...II-33 Trustee s Skills...II-33 Delegation by Trustee...II-34 Powers of a Settlor to Take Certain Actions with Respect to the Trust...II-34 Control and Protection of Trust Property...II-34 Record Keeping...II-34 Enforcement and Defense of Claims...II-34 Collecting Trust Property...II-34 Duty to Inform and Report...II-34 Discretionary Powers; Tax Savings...II-35 General Powers of Trustee...II-35 Specific Powers of Trustee...II-35 Trustee s Special Power to Appoint to a Second Trust...II-35 Distribution upon Termination...II-36 Notice of Deceased Medicaid Beneficiaries...II-36 iii

4 ARTICLE 8A POWERS, DUTIES, AND LIABILITY OF A POWER HOLDER OTHER THAN A TRUSTEE; DUTY AND LIABILITY OF A TRUSTEE WITH RESPECT TO POWER HOLDER S ACTIONS...II-36 ARTICLE 8B NORTH CAROLINA UNIFORM TRUST DECANTING ACT...II-36 Introduction...II-36 Scope...II-36 Application; Governing Law...II-37 Reasonable Reliance...II-37 Notice; Exercise of Decanting Power...II-37 Court Involvement...II-37 Formalities...II-37 Decanting Power...II-37 Trust for Beneficiary with Disability...II-38 Trust Limitation on Decanting...II-38 Change in Compensation...II-38 Relief from Liability and Indemnification...II-38 Removal or Replacement of Authorized Fiduciary...II-38 Tax-Related Limitation...II-38 Savings Provision...II-38 Settlor...II-38 ARTICLE 9 UNIFORM PRUDENT INVESTOR ACT...II-38 ARTICLE 10 LIABILITY OF TRUSTEES AND RIGHTS OF PERSONS DEALING WITH TRUSTEES...II-39 General Liability...II-39 Permissible and Impermissible Limitations of Liability...II-39 Liability for Life Insurance Policies...II-39 Remedies...II-39 Trustee Defenses and Protections...II-40 Personal Liability of Trustees to Third Parties...II-41 Protection of Persons Dealing with Trustee...II-42 Certification of Trust...II-43 III. NORTH CAROLINA PROBATE LAW PART I Samuel R. BJ Kilgore, III - Asheville CHAPTER 28A ADMINISTRATION OF DECEDENTS S ESTATES... III-1 SCOPE NOTE... III-1 DEFINITIONS AND JURISDICTION... III-1 Definitions... III-1 Jurisdiction over Estate Matters... III-1 Probate of Will... III-2 Venue... III-3 QUALIFICATION AND DISQUALIFICATION FOR LETTERS... III-4 Order of Persons Qualified to Serve... III-4 Persons Disqualified to Serve... III-4 iv

5 RENUNCIATION BY PERSONAL REPRESENTATIVE... III-5 Renunciation by Executor... III-5 Renunciation of Right to Administer... III-5 APPOINTMENT OF PERSONAL REPRESENTATIVE... III-5 Application for Letters; Grant of Letters... III-5 Letters Issued Without Notice; Exceptions... III-6 Appointment of Successor... III-6 Right to Contest Appointment... III-6 BOND... III-6 Exceptions to Bond Requirement... III-6 Bond Requirements... III-7 Modification of Bond Requirements... III-7 Rights of Surety and Breach of Bond... III-8 REVOCATION OF LETTERS... III-8 Revocation after Hearing... III-8 Summary Revocation... III-9 Appeals; Interlocutory Orders... III-9 RESIGNATION... III-9 COLLECTORS... III-10 REPRESENTATIVE S POWERS, DUTIES AND LIABILITIES... III-11 Time of Accrual of Duties and Powers... III-11 General Duties to Persons Interested in Estate... III-11 Specific Powers of Personal Representative or Fiduciary... III-12 Joint Personal Representative... III-12 Liability of Personal Representative... III-13 NOTICE OF CREDITORS... III-13 ASSETS OF THE ESTATE; DISCOVERY OF ASSETS... III-14 Assets of the Estate Available for Debts and Claims... III-14 Title and Possession of Property... III-14 Encumbered Property... III-15 Abatement of Shares... III-15 Action to Recover Property of a Decedent... III-15 Opening and Inventory of Decedent s Safe-Deposit Box... III-15 Digital Assets... III-16 SALES OR LEASES OF PERSONAL PROPERTY... III-16 SALES, LEASES OR MORTGAGES OF REAL PROPERTY... III-16 By Personal Representative... III-16 By Heirs or Devisees... III-17 ACTIONS AND PROCEEDINGS... III-17 Actions, Generally... III-17 Wrongful Death... III-18 CLAIMS AGAINST THE ESTATE... III-19 Manner of Presentation... III-19 Further Information or Affidavit of Claim May Be Required... III-19 Statute of Limitations... III-19 Order of Payment of Claims... III-20 Contingent Claims... III-20 v

6 Satisfaction and Rebate of Claims... III-21 Disputed Claims... III-21 Suits against Personal Representative... III-21 Equitable Distribution Claims... III-21 Funeral Expenses, Gravestone and Burial Place... III-21 INVENTORY... III-22 ACCOUNTING... III-22 DISTRIBUTION... III-23 After-born or After-adopted Child... III-23 Unknown Heir... III-24 Known but Unlocated Devisee or Heir... III-24 Minor... III-24 Nonresident Trustee... III-24 Inoperative Trust... III-24 SETTLEMENT... III-25 COMMISSIONS AND COUNSEL FEES... III-25 UNIFORM SIMULTANEOUS DEATH ACT... III-26 APPORTIONMENT OF FEDERAL ESTATE ACT... III-26 LIMITED PERSONAL REPRESENTATIVE... III-27 INTESTATE SUCCESSION... III-27 Shares of Persons Who Take Upon Intestacy... III-27 Advancements... III-29 Controversies under Chapter III-29 EXHIBIT A... III-31 IV. NORTH CAROLINA PROBATE LAW PART II Timothy W. Jones - Raleigh SMALL ESTATE ADMINISTRATION... IV-1 Administration by Affidavit... IV-1 Administration by Clerk of Superior Court... IV-4 NOTICE TO CREDITORS WITHOUT ESTATE ADMINISTRATION... IV-5 Circumstances When Procedure May Be Used... IV-5 Petition for Appointment of Limited Personal Representative... IV-5 Notice to Creditors... IV-6 Final Accounting... IV-6 SUMMARY ADMINISTRATION... IV-6 General Provisions... IV-6 Petition for Summary Administration... IV-6 Petition for Summary Administration of Estate without a Will... IV-6 Application for Probate and Petition for Summary Administration... IV-7 Order for Summary Administration... IV-7 Assumption of Liabilities by Spouse... IV-8 Fees... IV-8 Forms... IV-8 ESTATES OF MISSING PERSONS... IV-8 vi

7 Private Citizen Absentees... IV-8 Absentees Missing While in Military Service... IV-17 ANCILLARY ADMINISTRATION... IV-22 Introduction... IV-22 Procedure for Appointment of Ancillary Personal Representative... IV-23 Bond... IV-24 Payment of Claims and Expenses... IV-25 RIGHTS OF SURVIVING SPOUSE... IV-27 Intestate Share of Surviving Spouse... IV-27 Right to Elect Life Estate in Lieu of Intestate Share... IV-28 Right of Elective Share... IV-31 Spouse s Year s Allowance... IV-43 ACTS BARRING PROPERTY RIGHTS... IV-45 Acts Barring Rights of a Spouse... IV-45 Acts Barring Rights of Parents... IV-46 Willful and Unlawful Killing of Decedent: The Slayer Statute... IV-47 V. CHARITABLE GIVING Douglas W. Benson - Charlotte GIVING IT AWAY: CHARITABLE GIFT TECHNIQUES TO REDUCE THE TAXABLE ESTATE... V-1 INTRODUCTION... V-3 BASIC METHODS OF CHARITABLE GIVING... V-3 Outright Gifts or Bequests... V-3 Retained Interest Gifts... V-14 CHARITABLE REMAINDER TRUSTS... V-15 Required Characteristics... V-15 Two Basic Types of Charitable Remainder Trusts... V-18 Four Types of CRUTs... V-21 Calculation of Charitable Deduction... V-24 Current IRS Model (Sample) CRT Forms... V-26 Income Tax Considerations... V-29 Estate and Gift Tax Considerations... V-31 Trustees... V-31 Period of Payments... V-32 Taxation of Payments to the Noncharitable Beneficiary... V-33 Allocation of Capital Gain to Income... V-34 Timing of Payment of Unitrust and Annuity Amount... V-35 Valuation of Unmarketable Assets... V-36 Use of Certain Short-Term, High Payout Charitable Remainder Trust Eliminated... V-36 CRTs and Qualified Retirement Accounts... V-37 Other Drafting Issues... V-38 REMAINDER INTEREST IN A PERSONAL RESIDENCE OR FARM... V-40 General Considerations... V-40 vii

8 Income, Gift and Estate Tax Considerations... V-41 Implementation of Life Estate Arrangement... V-43 CHARITABLE GIFT ANNUITIES... V-43 General Considerations... V-43 Income, Gift and Estate Tax Considerations... V-45 Special Planning Options... V-48 CHARITABLE LEAD TRUSTS... V-49 Overview and Definition... V-49 Types... V-49 Qualification and Requirements... V-50 Tax Issues... V-54 CONCLUSION... V-57 ADDENDUM... V-58 VI. PARTNERSHIPS, LIMITED LIABILITY COMPANIES (LLCS) AND CORPORATIONS: ESTATE PLANNING AND PROBATE ISSUES Stephanie C. Daniel - Charlotte INTRODUCTION... VI-1 General... VI-1 Contents of Outline... VI-1 TYPES OF ENTITIES... VI-1 Sole Proprietorship... VI-1 General Partnership... VI-1 Limited Partnership... VI-2 Limited Liability Company ( LLC )... VI-2 Corporation... VI-2 Combination of Entities... VI-3 CHOICE OF ENTITY BY THE ESTATE PLANNING CLIENT... VI-3 Goals of the Estate Planning Client... VI-3 Factors Influencing the Choice of Entity... VI-3 CLASSIFICATION OF BUSINESS ENTITIES UNDER TREASURY REGULATIONS SECTIONS , -2 AND -3 (7701 REGULATIONS EFFECTIVE JANUARY 1, 1997)... VI-4 Definition of Business Entity... VI-4 Domestic Business Entities Classification... VI-5 Domestic Eligible Entities... VI-6 Election Mechanics... VI-8 Characterization of Elective Changes in Entity Classification... VI-9 Summary... VI-11 CONSIDERATIONS IN SELECTING THE GENERAL OR LIMITED PARTNERSHIP... VI-12 General Partnership... VI-12 Limited Partnership... VI-13 Choice of Law for General and Limited Partnerships... VI-15 Classification of a Partnership Interest... VI-15 viii

9 Tax Treatment of Contributions of Property to Partnership and Distributions to Partners... VI-16 Partnership Fringe Benefit Limitations... VI-29 Self-Employment Tax Considerations... VI-30 Section 701 Partnership Anti-abuse Regulation... VI-31 Common Applications of General and Limited Partnerships... VI-32 CONSIDERATIONS IN SELECTING THE LIMITED LIABILITY COMPANY... VI-38 Overview... VI-38 Advantageous Applications of Limited Liability Companies... VI-39 CONSIDERATIONS IN SELECTING THE S CORPORATION... VI-45 Overview... VI-45 Eligibility, Formation and Termination... VI-50 Taxation of Shareholders of S Corporations... VI-54 Advantages of Operating as an S Corporation... VI-64 Disadvantages of Operating as an S Corporation... VI-70 COMPARISON OF LIMITED LIABILITY ENTITIES LLC S, C AND S CORPORATIONS... VI-73 When the C Corporation is the Entity of Choice... VI-73 When the S Corporation id the Entity of Choice... VI-73 Comparisons of Entities... VI-74 MISCELLANEOUS ESTATE TAX CONSIDERATIONS INVOLVING CLOSELY HELD BUSINESS INTERESTS... VI-82 Estate Tax Deferral under Section VI-82 Redemption of Stock to Pay Death Taxes under Section VI-84 APPENDIX A... VI-87 VII. PROPERTY LAW: ESTATE PLANNING AND PROBATE ISSUES Jason W. Wenzel - Smithfield INTRODUCTION... VII-1 ESTATE PLANNING CONSIDERATIONS... VII-1 How Title is Conveyed in North Carolina... VII-1 Types of Deeds... VII-4 Tenancy by Entirety Issues... VII-6 Title Searching, Generally Why It Matters When Drafting Wills... VII-6 Funding Revocable Trusts with Real Estate... VII-12 Agricultural Use Values... VII-13 Surveys... VII-15 Conveying Property to Executor... VII-19 Easements... VII-22 ESTATE ADMINISTRATION... VII-33 Vesting... VII-33 Mortgages, Leases and Rents... VII-34 Sales by Heirs and Devisees... VII-36 Tenancy by the Entirety Property in Administration... VII-38 ix

10 Due on Sale Clause... VII-45 Joint Ownership with Right of Survivorship in Other Parties... VII-45 TRUST ADMINISTRATION... VII-46 Testamentary Trusts... VII-46 Revocable Trusts... VII-47 Sale of Real Property Trustee... VII-48 Certificate of Trust... VII-48 TRANSFERS TO MINORS... VII-49 TAX LIENS... VII-51 Federal Tax (IRS) Liens... VII-51 N.C. Department of Revenue Liens... VII-52 ANCILLARY ADMINISTRATION... VII-53 Real Property in Other Counties in North Carolina... VII-54 Real Property in Other States... VII-55 North Carolina Real Property Owned by a Non-Resident... VII-55 OTHER ISSUES... VII-56 Written Contract Executed by Decedent Prior to Death... VII-56 Estates Consisting of Only Real Estate... VII-57 Environmental Issues... VII-57 Specific Devise of Real Property/Adequacy of Description... VII-58 Renunciation and Disclaimer... VII-59 Absentee Property Owner... VII-61 Real Property Transfer on Death Act... VII-62 Incapacitated Persons and Sale of Real Property... VII-62 Short Sales... VII-63 Foreclosures... VII-63 Elective Share... VII-66 Scrivener s (now Corrective) Affidavit... VII-67 Title Insurance Policy and Commitment... VII-70 Recognizing (and Curing) Title Defects... VII-72 Insurance Coverage Expectations... VII-75 Title Insurance Exclusions and Exceptions... VII-75 CONCLUSION... VII-84 APPENDIX OF FORMS... VII-87 FORMS... VII-91 VIII. ESTATE PLANNING WITH POWERS OF ATTORNEY/GUARDIANSHIP AND WARD Linda F. Johnson Fuquay-Varina COVER PAGE... VIII-1 NEW FOR VIII-1 RESOURCES... VIII-3 NEW AND REVISED GUARDIANSHIP COURT FORMS... VIII-4 CHAPTER 35-A INCOMPETENCE AND GUARDIANSHIP... VIII-4 PROCEEDINGS TO DETERMINE INCOMPETENCE... VIII-4 x

11 GUARDIAN AND WARD... VIII-11 MANAGEMENT AND WARD S ESTATE... VIII-24 STANDBY GUARDIANS FOR MINOR CHILDREN... VIII-27 THE NORTH CAROLINA UNIFORM TRANSFERS TO MINORS ACT CHAPTER 33A... VIII-28 THE NORTH CAROLINA CUSTODIAL TRUST ACT CHAPTER 33B... VIII-38 CREDIT UNIONS... VIII-40 CONCLUSION... VIII-41 EXHIBITS... VIII-43 IX. RETIREMENT BENEFITS: ESTATE PLANNING AND PROBATE ISSUES John R. Cella, Jr. - Raleigh ACKNOWLEDGMENT... IX-1 INTRODUCTION... IX-1 CONSIDERATIONS FOR PLANNING WITH RETIREMENT BENEFITS... IX-2 Non-Tax Considerations... IX-2 Transfer Taxes... IX-3 Income Tax... IX-4 INFORMATION TO GATHER... IX-5 What Type of Retirement Assets are There... IX-5 What the Current Beneficiary Designations... IX-5 Possibly, a Copy of the Plan Itself and/or the Summary Plan Description... IX-5 INCOME TAX RULES... IX-6 During the Participant s Lifetime... IX-6 Consequences for Failure to Take RMD... IX-10 After the Participant s Death... IX-11 Modifying Beneficiaries for Purposes of the RMD Rules After the Participant s Death... IX-21 Income Tax Deduction for Estate Taxes Paid... IX-25 ASSET PROTECTION... IX-26 Introduction... IX-26 Bankruptcy Law Primer... IX-26 Federal Bankruptcy Protection... IX-26 North Carolina State Law Protection... IX-27 CONCLUSION... IX-27 EXHIBITS... IX-29 xi

12 X. GROSS ESTATE Heidi E. Royal - Charlotte INTRODUCTION... X-1 SECTION PROPERTY IN WHICH THE DECEDENT HAD AN INTEREST... X-1 Routine Inclusions... X-1 Dividends Paid After Death... X-2 Tax-Exempt Bonds, Other Property and Property Interests... X-2 Partnership Interests and Post-Mortem Payments... X-3 Accrued Income... X-3 Self-Canceling Notes... X-3 Notes to Heirs... X-4 Tax Refund Claims... X-4 Claims for Wrongful Death... X-4 Compensation Paid After Death... X-4 Deferred Compensation Paid After Death... X-4 Attorney s Contingent Fees Paid after Death... X-4 Post-Death Employment Benefits... X-5 Social Security Act... X-5 Life Insurance... X-5 Tenancy in Common Interests... X-5 Life Estates... X-5 Future Interests... X-5 Incomplete or Void Transfers before Death... X-6 Decedent s Interest is Determined by Local Property Law... X-6 Resulting Trusts... X-7 SECTION DOWER, CURTESY OR SIMILAR INTERESTS... X-7 SECTION ADJUSTMENTS FOR GIFTS MADE WITHIN 3 YEARS OF DECEDENT S DEATH... X-7 Inclusion of Certain Gifts Made Within 3 Years of Death... X-8 Voting Rights of Controlled Corporation Stock... X-8 Life Insurance Transfers Within 3 Years of Death... X-8 Some Post-1981 Gifts Made within 3 Years of Death are Still Included for Other Calculations... X-10 Gift Taxes Paid within 3 Years of Death... X-10 Net Gift Doctrine... X-11 SECTION TRANSFERS WITH RETAINED LIFE ESTATE... X-11 Excluded Transfers... X-12 Period for Which Interest is Retained... X-13 Retained Interest... X-14 Reservation of Right to Designate Beneficiaries... X-15 Includible Amount... X-17 Inclusion of Property Transferred to Family Partnerships... X-17 Stock Transferred and Retention of Voting Rights (Anti-Byrum Rule) and Use of Underlying Assets... X-23 xii

13 Retained Timber Rights... X-24 Transfer to Pre-Existing Trust... X-24 Use Retained for Limited Periods... X-24 O Malley Rule... X-25 Discharge of Support Obligations... X-25 Cases Involving Farms... X-25 Implied Reservation of Life Estate... X-26 Transfer of Residence to Children... X-26 Reciprocal Trusts... X-27 SECTION TRANSFERS TAKING EFFECT AT DEATH... X-28 Taxable Transfers... X-28 Excluded Transfers... X-29 Examples Provided in Regulations... X-29 Survivorship Requirement... X-29 Effect of General Power of Appointment... X-30 Reversionary Interest Requirement... X-30 The 5% Value Requirement... X-31 Amount Included in Gross Estate... X-31 Life Estate Outstanding at Decedent s Death... X-31 Reversionary Interest Relinquished before Death... X-31 SECTION REVOCABLE TRUSTS... X-32 Introduction... X-32 Property not Included... X-32 Revocable Transfers... X-32 Exercise of Power Only After Notice or Event... X-33 Power Need not Benefit Decedent... X-33 Fiduciary Powers... X-34 Amount Includible is Value of Interest Subject to Power... X-35 Custodian Accounts... X-36 Savings Bank ( TOTTEN ) Trusts... X Plan Account... X-37 Power Exercisable After Conditions... X-37 Incompetency of Power Holder... X-37 Power in Conjunction with Others... X-37 Relinquishment of Power... X-38 Gifts Made by Attorney-in-Fact... X-38 Gifts Made by Guardians... X-39 SECTION JOINT INTERESTS... X-39 Tenants in Common... X-39 Joint Ownership with Survivorship Rights... X-39 Includibility Where Acquired by Gift... X-40 Consideration Furnished Test... X-40 Who Furnished the Consideration?... X-42 Spouses Jointly Owned Property: Estates of Decedents Dying After X-43 SECTION POWERS OF APPOINTMENT... X-43 Introduction... X-43 xiii

14 Powers of Appointment... X-44 Doctrine of Consistency... X-47 Joint Powers... X-48 When is the Power Created... X-50 Reimbursement of Attributable Tax by Recipient... X-50 Exception as to Certain Non-general Powers... X-50 Taxation of Post-October 21, 1042 Powers... X-51 Power over Portion, Interest, or Subject to Contingency... X-51 Exercise or Release of General Power before Donee s Death... X-52 Ineffective Release... X-52 Lapse of Power Treated as Release... X-52 Qualified Disclaimer of General Power... X-54 Taxation of Pre-October 22, 1942 Powers... X-54 SECTION TRANSFERS FOR INSUFFICIENT CONSIDERATION.. X-56 Introduction... X-56 Time for Determining Adequacy of Consideration... X-56 Transfer in Exchange for Marital Property Rights... X-56 EXHIBIT A... X-59 XI. VALUATION OF GROSS ESTATE Andrea C. Chomakos - Charlotte SCOPE OF THIS PRESENTATION... XI-1 VALUING THE GROSS ESTATE... XI-1 General Rules... XI-1 VALUING SPECIFIC TYPES OF ASSETS... XI-5 Items of Property Generally Sold to the Public at Retail... XI-6 Valuation of Certain Business Interests... XI-7 Valuation of Other Types of Property Interests... XI-8 Nonspecified Property Interests... XI-12 Methods of Valuing Property Interests... XI-15 Premiums and Discounts against Full Value of Property Interests... XI-22 VALUING PROPERTY SUBJECT TO BUY-SELL AND OTHER RESTRICTIVE AGREEMENTS (SECTION 2703)... XI-29 Restrictions on Sale or Disposition... XI-29 Restrictive Agreements before Section XI-31 ALTERNATE VALUATION METHOD (SECTION 2032)... XI-33 Electing the Alternate Valuation Method... XI-33 Sold, Exchanged, or Otherwise Disposed Of... XI-34 Date of Sale, Exchange or Other Disposition... XI-35 Meaning of Distributed... XI-36 Included Property and Excluded Property... XI-37 Property Interests Affected by Mere Lapse of Time... XI-39 Effect of Alternate Valuation upon Estate Tax Deductions... XI-40 Post Mortem Planning With the Alternate Valuation Method... XI-40 Proposed Regulations... XI-42 xiv

15 SPECIAL VALUATION OF CERTAIN REAL PROPERTY... XI-43 Requirements of Section 2032A... XI-43 Valuation under 2032A... XI-47 Section 2032A Election and Agreement... XI-48 Recapture of Estate Tax Benefit... XI-49 CIVIL PENALTIES FOR VALUATION MISSTATEMENTS... XI-51 Accuracy-Related Penalty... XI-51 Civil Fraud... XI-52 XII. ESTATE TAX: ESTATE TAX DEDUCTIONS, CREDITS AND PAYMENTS OF TAX Elinor J. Elie Foy Raleigh SCOPE OF OUTLINE... XII-1 GROSS ESTATE... XII-1 FEDERAL ESTATE TAX DEDUCTION... XII-2 Expenses, Indebtedness and Taxes... XII-2 Uncompensated Losses Due to Casualties or Theft... XII-17 State Death Taxes... XII-17 Disallowance of Double Deductions... XII-17 FEDERAL ESTATE TAX CREDITS... XII-18 Estate Tax Unified Credit... XII-18 Credit for State Death Tax... XII-23 Credit for Pre-1977 Gift Taxes... XII-23 Credit for Tax on Prior Transfers... XII-23 Credit for Foreign Death Taxes... XII-25 PAYMENT OF FEDERAL ESTATE TAX... XII-26 Responsibility for Paying Tax... XII-26 Filing Requirement... XII-26 Due Date for Return and Payment... XII-27 Failure to File and Pay... XII-30 APPENDICES... XII-33 XIII. MARITAL DEDUCTION N. Lucille Lucy Siler - Charlotte INTRODUCTION... XIII-1 QUALIFICATION REQUIREMENTS... XIII-1 Easy Requirements... XIII-1 Problems and Litigation Areas... XIII-6 THE NONDEDUCTIBLE TERMINABLE INTEREST RULE... XIII-6 In General... XIII-6 Terminable Interests... XIII-7 Nondeductible Terminable Interests... XIII-9 Deductible Terminable Interests... XIII-12 xv

16 PORTABILITY... XIII-21 In General... XIII-21 Definitions... XIII-21 Operation... XIII-21 Making the Election... XIII-22 Failing to Make the Election... XIII-23 Effect on Statute of Limitation... XIII-23 NONCITIZEN SPOUSE... XIII-24 In General... XIII-24 Exceptions... XIII-24 VALUATION OF INTERESTS PASSING TO THE SURVIVING SPOUSE... XIII-26 Introduction... XIII-26 Death Taxes... XIII-26 Encumbrances and Obligations... XIII-27 Estate Administration Expenses... XIII-27 FUNDING MARITAL DEDUCTION TRANSFERS... XIII-28 In General... XIII-28 Pecuniary Formulas... XIII-28 Factional Formulas... XIII-30 COMMUNITY PROPERTY... XIII-31 XIV. GIFT TAX/UNIFORM TRANSFERS TO MINORS ACT Bradley T. Van Hoy - Charlotte PART I FEDERAL GIFT TAX... XIV-1 SCOPE NOTE... XIV-1 WHO IS SUBJECT TO THE GIFT TAX?... XIV-1 North Carolina Gift Tax... XIV-1 U.S. Citizens and Residents... XIV-1 Nonresident Non-citizens... XIV-1 WHAT IS SUBJECT TO THE GIFT TAX?... XIV-3 Gift, Definition... XIV-3 Indirect Gifts... XIV-3 Part Sale Part Gift... XIV-4 Complete v. Incomplete Gifts... XIV-4 Gifts Pursuant to a Power of Attorney... XIV-5 Powers of Appointment... XIV-7 Disclaimers or Renunciations... XIV-9 Payment of Income Taxes by Grantor of a Grantor Trust is Not a Gift... XIV-9 WHAT GIFTS ARE EXCLUDIBLE OR DEDUCTIBLE?... XIV-10 Exclusions and Exemptions... XIV-10 Deductions... XIV-14 WHAT IS THE VALUE OF THE GIFT AND HOW MUCH GIFT TAX IS IMPOSED... XIV-19 xvi

17 Valuation Gifts... XIV-19 Taxation of Gifts... XIV-22 REPORTING GIFTS... XIV-24 Gift Tax Return Form... XIV-24 Who Must File... XIV-24 Timing... XIV-25 PART II NORTH CAROLINA UNIFORM TRANSFERS TO MINORS ACT AND NORTH CAROLINA UNIFORM CUSTODIAL TRUST ACT... XIV-27 SCOPE NOTE... XIV-27 NORTH CAROLINA UNIFORM TRANSFERS TO MINORS ACT... XIV-27 Statutory Provisions... XIV-27 Use of UTMA Account... XIV-27 Definitions... XIV-27 Requirements... XIV-28 Methods of Transfer... XIV-28 Control... XIV-32 Acknowledgement of Transfer... XIV-32 Validity and Effect of Transfer... XIV-32 Custodians and Care of Custodial Property... XIV-32 Relationship with Third Parties... XIV-35 Jurisdiction and Scope of the Act... XIV-36 NORTH CAROLINA UNIFORM CUSTODIAL TRUST ACT... XIV-36 Statutory Provisions... XIV-36 Use of a Custodial Trust... XIV-36 Definitions... XIV-36 Requirements... XIV-37 Methods of Transfer... XIV-38 Ownership... XIV-41 Custodial Trustee and Care of Custodial Trust Property... XIV-41 Determination of Incapacity... XIV-45 Relationship with Third Parties... XIV-46 Applicability... XIV-46 CREDIT UNIONS... XIV-46 Account... XIV-46 Death of Minor... XIV-46 COMPARISON... XIV-47 UTMA... XIV-47 UCTA... XIV-47 XV. FIDUCIARY INCOME TAX OF TRUSTS AND ESTATES Sandi O. Thorman, CPA - Charlotte SCOPE NOTE... XV-1 INDEX... XV-1 REQUIREMENT TO FILE... XV-2 xvii

18 Income Tax Return, Form XV-2 Taxable Year... XV-2 IRC 645 Election... XV-3 TYPES OF TRUSTS... XV-4 Simple Trusts... XV-4 Complex Trusts... XV-4 Examples of Simple and Complex Trusts... XV-5 Grantor Trusts... XV-5 BASIC APPROACH TO TAXATION... XV-6 FIDUCIARY ACCOUNTING INCOME (FAI)... XV-6 FAI FAQ S... XV-6 Order of Authority for Determining FAI... XV-7 Principal and Income... XV-7 Uniform Principal and Income Act (UPAIA)... XV-7 Fiduciary Chart of Accounts... XV-11 TAXABLE INCOME... XV-11 Definition of Taxable Income... XV-11 Administration Expenses... XV-12 Claim Deductions on Form 1041 Instead of Form XV-12 Tax Rates... XV-13 Miscellaneous Itemized Deductions... XV-16 DISTRIBUTABLE NET INCOME (DNI)... XV-17 Definition of DNI... XV-17 Capital Gains in DNI... XV-18 Net Investment Income Tax (NIIT)... XV-18 Alternative Minimum Tax (AMT)... XV-19 DISTRIBUTION DEDUCTION... XV-19 Definition of Distribution Deduction... XV-19 Specific Bequests... XV Day Rule... XV-20 STATE INCOME TAXATION... XV-20 Summary of State Income Taxation... XV-20 Approach to State Income Taxation... XV-21 NC Income Tax Return, Form D XV-21 Kaestner Case... XV-22 NC Senate Bill XV-23 ATTACHMENTS... XV-25 XVI. GENERATION SKIPPING TRANSFER TAX Ansley C. Cella Raleigh INTRODUCTION... XVI-1 OVERVIEW OF THE GENERATION SKIPPING TRANSFER TAX... XVI-2 Skip Person... XVI-2 Non-Skip Person... XVI-3 Generational Assignments... XVI-3 xviii

19 Generation Skipping Transfer Events... XVI-5 Exclusion from GST Tax... XVI-9 GST Tax Exemption... XVI-9 Deemed Allocation of GST Tax Exemption... XVI-13 Computation and Payment of Generation-Skipping Transfer Tax... XVI-16 EFFECTIVE USE OF THE GST EXEMPTION... XVI-16 Inclusion Rule... XVI-16 Partially Exempt Trusts... XVI-17 Redetermining Inclusion Ratio... XVI-17 Gift Splitting... XVI-19 Integration with QTIP Elections... XVI-20 PLANNING TO AVOID APPLICATION OF GST TAX... XVI-21 Preserve Grandfathered Trusts... XVI-21 Estates under the GST Exemption Amount... XVI-22 Estates over the GST Exemption Amount... XVI-23 Allocation of GST Exemption in Estate of Unmarried Person... XVI-25 XVII. ANNUITIES AND LIFE INSURANCE: ESTATE, GIFT AND INCOME TAX ISSUES Rick E. Graves - Wilmington INTRODUCTION... XVII-1 LIFE INSURANCE... XVII-1 Definition... XVII-1 Types of Life Insurance Contracts... XVII-1 Income Taxation of Life Insurance... XVII-6 Gift Tax Issues Related to Life Insurance... XVII-21 Proceeds of Life Insurance Estate Tax Issues... XVII-30 Asset Protection... XVII-43 ANNUITIES... XVII-45 Definition... XVII-45 Types of Annuities Contacts... XVII-45 Income Taxation of Annuities... XVII-49 Gift Tax Issues Related to Annuities... XVII-52 Estate Tax Inclusion Related to Annuities... XVII-53 COMMENTS ON SUITABILITY... XVII-65 xix