Tangible Personal Property and Its Place in the Estate Settlement Process.

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1 The following information and opinions are provided courtesy of Wells Fargo Bank, N.A. Tangible Personal Property and Its Place in the Estate Settlement Process. Prepared by: Daniel B. Allen, CTFA, Vice President and Regional Fiduciary Manager, Wells Fargo Bank Estate Services. In this white paper 1 Introduction 1 What is tangible personal property? 1 Tangible personal property within the estate settlement process 2 How to help avoid fighting heirs 3 Conclusion

2 Tangible Personal Property and Its Place in the Estate Settlement Process Introduction. Many people worry about what will happen to their possessions when they pass away. Who will get the piano? What will happen to the antique grandfather clock? Would any of my children want my silver tea set? If these questions were not addressed during life or in estate planning documents, they will need to be addressed after death. Without clear direction from the decedent, either residual clauses in estate planning documents or state law will dictate to whom these items will go. The answers to these questions will all be ironed out during the death settlement process. The death settlement process is the work that is required to accurately implement a decedent s estate plan, handle any disputes with the estate, and ultimately distribute estate assets to heirs in an efficient manner. This paper discusses a specific class of assets held in an estate, namely tangible personal property, and the process in which those assets are transferred to their new owner during death settlement. This paper will also touch on opportunities and offer suggestions to help alleviate tension among beneficiaries during the time of this transfer. It is easy to imagine the emotional attachment family members may have with the photo album or the heirloom piece of furniture passed down for generations. What is tangible personal property? Tangible personal property is defined by the IRS as any tangible property that is not real property. 1 For the purposes of this paper, tangible personal property includes everything from household pets and vehicles to the artwork hanging on the living room wall and the contents of the office bookcase. It is easy to imagine the emotional attachment family members may have with the photo album or the heirloom piece of furniture passed down for generations. While many of these items may not necessarily hold great monetary value, a great number of battles both inside the courtroom and out are fought over these knickknacks and household goods. Both good planning and conversations with family members prior to death can help avoid many of the pitfalls surrounding the disposition of tangible personal property and the conflict that can arise between heirs. Tangible personal property within the estate settlement process. One of the first steps in the death settlement process is to marshal and secure the decedent s assets: real estate, personal property, stocks and bonds, certificate of deposits, cash, brokerage accounts, retirement accounts, etc. In regard to tangible personal property, the executor or trustee is charged with gathering all the tangible personal property owned at the time of death and securing (protecting and locking down) it. In addition, if the decedent s estate will require a death tax return filing such as a state death tax return or federal estate tax return, the items must also be inventoried and appraised so that they can be attached to those returns. Generally these items can be easily ascertainable upon entering a house. With a quick walkthrough, the art, furniture, and other housewares can be inventoried and secured. However, depending on the size of the estate, the number of properties owned at the time of death, and the information (or lack of information) shared by the decedent with others, this can be a rather tedious undertaking. Coins and silver may be locked away in a safe or safety deposit box; furs may be in storage at the department store; and valuable jewelry may be hidden throughout the house. Also, depending on the decedent s mental state prior to death, executors may have to conduct some investigative work: valuable jewelry has been found sewn into the seams of curtains and gold buried in the backyard. In one instance, executors found valuables stashed in what looked like ordinary cans of green Tangible Personal Property and Its Place in the Estate Settlement Process 1

3 beans. The cans had been opened, emptied, filled with valuables, and re-soldered closed before being replaced on the pantry shelf. Once the tangible personal property has been located, secured, inventoried, and appraised, if necessary, it is the executor s duty to properly distribute those items in accordance with the decedent s wishes. To achieve this, the executor reviews the decedent s estate planning documents to search out the controlling articles or paragraphs. There are primarily three ways these items are distributed: 1) specific bequests 2) separate writings 3) residual bequests In the case of specific bequests, certain items are named specifically in the will or trust. The executor or trustee is directed to hand over a clearly identified item to a specific individual or entity (for example, I give my 1952 Concert Grand Piano Serial No to the San Francisco Ballet. ) Without clear identification, the decedent s intent may be difficult to understand and carry out. For example, imagine the confusion if a will included language stating, I give my gold watch to my son, and three gold watches were found in the decedent s possessions at the time of death. The separate writing is for those individuals who may often change their mind over the disposition of the tangible personal property. The will or trust often will say, In regard to tangible personal property, I direct my Executor to distribute it in the manner set forth in a separate hand written memo held in my safety deposit box at the time of my death. The writing is typically a list of specific items of tangible personal property next to the name of the intended beneficiary. In both these situations, the decedent s intent is clear. Both the executor and the heir has a clear understanding of what goes to whom. In some situations, the decedent either did not have specific wishes for household items and heirlooms or felt like their heirs could divide the tangible personal property on their own accord. This is normally referred to as a residual bequest. This article or paragraph is usually found near the end of an estate planning document and states, more or less, that all tangible personal property not otherwise distributed above is to be added to the rest and residue of my estate to be divided equally amongst my heirs. While this may turn into an emotional battlefield (as heirs fight over the $2 ceramic vase and which heir has a more significant emotional attachment to the vase), many estate planning documents have added stalemate or tie-breaker language, which creates a dispute resolution process as a backup when a decision cannot be made. This may take the form of perhaps drawing straws or numbers, or assigning ultimate decisionmaking power to one individual or the executor. How to help avoid fighting heirs. Although there are no fail-safe means to keep heirs and loved ones from battling over the tangible personal property left in an estate, there are several steps one can take prior to death that may lead to a more amicable atmosphere during the disposition process. 1) Talk with your heirs. The simplest step is to verify that all beneficiaries/heirs are on the same page regarding the disposition of the estate. While certain family dynamics may not make this possible, having the conversations and understanding what items have the most emotional significance to each heir can help in determining who gets what. It can ultimately lead to a smooth and agreeable transition after a very emotional loss. In addition, inform family or a trusted advisor of tangible personal property. If the executor has to search for hidden property, it will ultimately be a cost, whether time or money, to the estate. 2) Preparation of a tangible personal property inventory. For insurance purposes, many homeowners and collectors already have inventories of household items that require extra insurance coverage. This itemized list or inventory is a great first step in creating a tangible personal property memorandum. 3) Specific bequest language. If there are certain items that hold more meaning, direct your executor to distribute them to a specific heir with specific bequest language. It gives clear cut direction and eliminates all ambiguity. 4) Gifting during life. If possible, distribute the silver tea set or the heirloom to a family member during lifetime. Tangible personal property that has been gifted prior to death may not be included in the death settlement process. 2 Tangible Personal Property and Its Place in the Estate Settlement Process

4 Conclusion. Tangible personal property, on average, makes up only a small portion of an estate s monetary value, but it has the potential to create a very antagonistic relationship between heirs. The emotional significance the property holds for each individual is difficult to measure, and can lead to misunderstandings and anger. While it is the job of the executor to deal with these issues, several strategies set up during life can give clear direction and provide a smooth transition during the estate settlement process. End notes. 1 Real property is defined by Black s Law Dictionary as land and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land. Tangible Personal Property and Its Place in the Estate Settlement Process 3

5 Disclosures. Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. This information is provided for educational and illustration purposes only. The information and opinions in this report were prepared by the investment management division within Wells Fargo Wealth Management. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Wealth Management s opinion as of the date of this report and are for general information purposes only. Wells Fargo Wealth Management does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Wells Fargo and Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Wells Fargo Bank, N.A. (the Bank ) offers various advisory and fiduciary products and services. Financial Advisors of Wells Fargo Advisors may refer clients to the bank for an ongoing or one-time fee. The role of the Financial Advisor with respect to bank products and services is limited to referral and relationship management services. The Bank is responsible for the day-to-day management of non brokerage accounts and for providing investment advice, investment management services and wealth management services to clients. The Financial Advisor does not provide investment advice or brokerage services to Bank accounts, but does offer, as applicable, brokerage services and investment advice to brokerage accounts held at Wells Fargo Advisors. The views, opinions and portfolios may differ from our broker dealer affiliates. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Bank, N.A. All rights reserved. Member FDIC. NMLSR ID WM29521 ( /13) CAR#