My uncle, a single man, divorced his wife 25 years ago. They had a son who was childless and also single. My uncle’s closest blood relatives are nephews and nieces that live overseas.
Although he tried to get one of his nieces to administer his estate when he felt ill, she was not a U.S. resident and could not be named a trustee. My uncle then requested that his ex-wife be a trustee of his revocable living trust and will, but he was adamant that she cannot inherit his money as they already split their assets during their divorce.
My uncle passed away a few months ago. His trust named his son as the only beneficiary of his home and had no alternate beneficiaries. Shortly after my uncle died, his son became very ill and passed away before being able to take possession of the house.
Is it true that, without beneficiaries, the trust is terminated and the remaining assets are passed on to my uncle’s estate?
‘My uncle’s will is not complete, in that he named his ex-wife as the executor and he made a list of his assets but did not name beneficiaries.’
Also, if the house becomes part of my uncle’s estate, when the estate sells the house along with stocks and CDs that are part of the estate, can the estate use the IRS “step-up in basis” and avoid paying capital gains on any asset that may have gains?
There’s one more complication in this case. My uncle’s will is not complete, in that he named his ex-wife as the executor and he made a list of his assets but did not name beneficiaries. The ex-wife now claims that her son should have inherited everything.
Given that he was single and childless, she thinks she should inherit everything ($2 million). My uncle’s closest blood relatives (nieces and nephews) think that his estate should go to them since no known beneficiaries of the trust or will exist. Nevertheless, they want to honor my uncle’s wish that the house belonged to his late son and are willing to let the ex-wife keep it. Everyone agrees that probate is out of the question.
We would greatly appreciate it if you would let us know your opinion so we can all understand this better and hopefully resolve it in a fair way but without probate.
A Nephew
Related: ‘Why am I so afraid to retire?’ I’m 60 and lost $1.2 million in a divorce. Can I rebuild my life?
Dear Nephew,
This is an unholy trinity of estate-planning misadventures.
First, there was no contingent beneficiary listed on the trust. Second, there was no completed will. Third, the family doesn’t get to decide what part of the estate does and does not go through probate. Your uncle’s ex-wife is not an heir and will not inherit the house under state law, regardless of where they live or because she believes she deserves it.
Antilapse laws, which prevent the rules of a trust or will from lapsing, vary by state. In New York, if an heir passes away before probate is complete, the deceased heirs’ siblings or “issue” — that is, children — would be next in line. In California, the inheritance would be disbursed to the deceased heir’s children, if they had any.
However, your cousin did not have any siblings or children, so that rule would not, in all likelihood, apply here. “If a deceased beneficiary was the sole heir and no contingent beneficiary is named, the inheritance may return to the estate’s residual beneficiaries, according to the Werner Law Firm, which has offices in California.
In New York, if an heir passes away before probate is complete, the deceased heirs’ siblings or ‘issue’ would be next in line.
“If no such beneficiaries exist, assets are typically distributed according to intestacy laws, which vary by state,” it adds. “Under intestacy laws, assets are generally distributed to the deceased’s closest living relatives, such as spouses, children, or siblings. The estate may eventually escheat to the state if no heirs can be located.”
As for your uncle’s house, if there was no will and no transfer-on-death deed or co-owner with survivorship rights, it would become part of his probate estate and be distributed in accordance with intestacy laws in that state. The same goes for any other accounts where there is no beneficiary listed.
In other words, the laws of the state would then decide who is next in line to receive your uncle’s $2 million estate. With no spouse, children or grandchildren living — stepchildren and former spouses don’t count — the order of succession is parents, siblings, nieces and nephews, grandparents, aunts and uncles and, lastly, cousins.
If there was no will or transfer-on-death deed, the house would become part of his probate estate and be distributed in accordance with intestacy laws.
Your uncle did not plan for all eventualities. “An estate plan should be flexible enough to adapt to life’s uncertainties, including the unexpected passing of a beneficiary,” Werner Law Firm adds. “By including clear contingencies and understanding inheritance laws, you can ensure that assets pass efficiently to the intended heirs without unnecessary legal challenges.”
Not all assets receive a step-up in basis — that is, the fair market value is taxed at the time of the person’s death, rather than the original cost of the asset. Under IRS rules, assets that are not eligible include those inside retirement accounts, including an IRA or 401(k), and irrevocable trusts, as they were technically no longer owned by the decedent.
This gives you a broad overview of the landscape, but a trust-and-estate lawyer in your uncle’s state can give you more details on what to expect. Your uncle’s estate planning left too many loose ends and there are many moving parts — the house, the trust and the rest of his assets — to deal with. Good luck to whomever inherits the $2 million.
They may already be planning how to spend it.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com.
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