Understanding Inheritance Tax Allocation in Trusts: Insights from the Nebraska Supreme Court

In the case of "In re Michael Hessler Living Trust," the Nebraska Supreme Court interpreted directives concerning inheritance tax allocation as specified in a living trust formed by the decedent, Michael Hessler. The appellants, Hessler's children, contested the trustee's decisions regarding the distribution of the trust's assets and the payment of inheritance taxes, especially about a significant property granted to the decedent's girlfriend, Lori J. Miller.

Michael Hessler established a living trust in 2006, with subsequent amendments, notably one that explicitly bequeathed his residence to his girlfriend, Lori J. Miller, provided she lived there at the time of his death. Following Hessler's death in November 2020, disagreements emerged over who should bear the burden of inheritance taxes. Specifically, the dispute centered on whether these taxes should be equally apportioned among all beneficiaries or paid from the trust's residue as directed by the trust's provisions.

Hessler's children filed a petition against the trustee and Miller, asserting that inheritance taxes and administrative expenses related to the residence should be charged against Miller's share. The trustee moved the case to Scotts Bluff County, asserting that the trust was registered there, a move that the children later contested. Ultimately, the Court upheld the venue transfer.

The Nebraska Supreme Court addressed several critical issues in this case:

1. Venue Transfer: The Court upheld the venue transfer, stating it was within the trial court's discretion and justified by the trust's registration in Scotts Bluff County.

2. Inheritance Tax Apportionment: A central issue was the interpretation of the trust's language regarding the payment of inheritance taxes. The trust explicitly stated that all inheritance and estate taxes should be paid "from this trust," which the Court interpreted as a clear and unambiguous directive that superseded the default statutory provisions requiring equal apportionment among beneficiaries.

3. Jurisdiction and Admissibility of Evidence: The Court determined it had jurisdiction over the appeal and held that the lower Court did not significantly err in admitting extrinsic evidence to determine the settlor's intent. The Court stated that any such mistake was harmless as the decision rested primarily on the clear language of the trust and its amendments.

The Supreme Court affirmed the lower Court's decision, validating the trustee's actions in administering the trust according to the settlor's explicit instructions. The ruling clarified how trust documents concerning tax liabilities should be interpreted and reinforced the legal principle that clear and unambiguous language in a trust document or will must be adhered to. This decision provides crucial guidance on the administration of estates and the responsibilities of trustees.

This case underscores the importance of precise language in estate planning documents, especially concerning tax obligations. It illustrates the complexities of trust administration, particularly when substantial assets and tax implications are involved. Additionally, it highlights the judiciary's role in resolving disputes based on the interpretation of legal documents following the settlor's intent.

This decision serves as a critical reference for legal professionals involved in estate planning and trust administration. It emphasizes the need for clarity and specificity in drafting trust documents to ensure the settlor's wishes are accurately executed and legal conflicts are minimized. The ruling in this case is a vital reminder of the importance of meticulous estate planning and the impact of precise language in legal documents. Erickson Sederstrom Law Firm is here to help you you with all of your Estate Planning needs.

Joseph C. Byam and Joseph C. Byam II Join Erickson | Sederstrom Team

Erickson | Sederstrom is pleased to announce that attorneys Joseph C. Byam and Joseph C. Byam II, from the law firm of Byam & Hoarty, have joined the firm.

“Erickson | Sederstrom is a long-standing Nebraska firm that has attorneys who specialize in numerous practice areas. The merger will allow us to provide our clients with the depth of these practice areas, and the experience and expertise of the attorneys who practice in these areas. We think it is a great fit and are excited to get started,” says Joseph C. Byam II.

Joseph C. Byam will serve as Of Counsel to the firm, and continue to assist clients in estate planning, probate, and general business and corporate matters. 

Joseph C. Byam II will join the firm as an Associate working in the areas of estate planning. His practice includes preparing estate plans, trust administration, probate of estates, and issues related to both federal and state inheritance tax. He also advises clients in corporate or company formations.

Erickson | Sederstrom welcomes the addition of attorneys Joseph C. Byam and Joseph C. Byam II to their team.

Don’t Forget the Basics Estate Planning is About People

Estate planning attorneys and clients are once again awaiting possible sweeping changes in estate taxation. Will the cherished step-up in cost basis of capital assets go away? Will unrealized capital gains be recognized at death? What will the exclusion amounts be for federal estate tax? At the moment, answers are murky at best.

These are undoubtedly big changes being considered by Congress. But what can a client do in the meantime? The answer is simple: mind to the basic building blocks of your estate plan. The basics aren’t sexy. But they are crucial elements to your plan. This is the first in a series of articles which will examine the crucial but often overlooked decisions that make or break an estate plan.

What is the first essential building block of an estate plan? Is it the power of attorney? The last will? Maybe a trust? These are all good tools, but in the end, they are just ink on paper. Estate plans are not self-executing. We rely on people to carry them out. Your will may direct that a certain piece of property be given to so and so, but it takes a living, breathing person to secure, safeguard, account for, and physically deliver that property to the intended beneficiary. Thus, the selection and ongoing review of these critical players in your estate plan deserves careful consideration.

The challenge is that people and relationships change, often quickly. Our skills, temperaments, and relationships with others are constantly in flux. The person you entrusted five years ago to oversee your estate or serve as your power of attorney may now be unsuitable for a host of reasons that you could not have foreseen.

To address this, I recommend that my clients critically review their estate plan each year with a special focus on the people they’ve chosen to serve in these roles. I encourage them to ask themselves the following questions:

o Are the people I’ve appointed as my children’s guardian, my trustee, executor, or agents under my power of attorney still the best choices to ensure my wishes are carried out? Are any of them experiencing health issues, marriage problems, addiction issues, or other major life distractions that they were not experiencing when I first named them as a fiduciary? Do I still trust these individuals as I once did?

o What natural skills do each of these individuals exhibit? Who in my life exhibits the key characteristics of a fiduciary, namely trustworthiness, organization, and accountability?

o Do the people I’ve currently nominated to serve as fiduciaries reflect outdated or faulty notions? For example, did I nominate my son to be my Power of Attorney only because he lives in close proximity to me when another child of mine who lives far away might actually be better suited? Or, did I nominate my oldest daughter to serve as my Successor Trustee because I was afraid of hurting her feelings?

o Whom do I really trust to make personal medical decisions for me if I am incapacitated?

o Have I given enough consideration to the alternate fiduciaries who may be called upon if my first choice is unable to serve?

o What are my children’s relationships like with each other? Are they harmonious? Contentious? If I elevate one of my children to administer my estate at my death or be my primary medical decision maker, will it lead to unnecessary strife or litigation?

These can be messy questions indeed. Don’t breeze past the identification of the proper people to carry out your estate plan or protect you in the case of an incapacity. Talk with your attorney, review whom you have selected to fill these roles, and make appropriate changes as necessary. It’s worth a modest invoice from your attorney to ensure the people with the right skills and temperament are in place.

Please contact E|S trust and estate attorneys with questions on how to approach your own comprehensive estate plan to fit your needs.

Why Everyone Needs A Comprehensive Estate Plan

You have likely already made a diligent effort to choose a knowledgeable financial advisor and create a sound financial plan, whether that means starting a college savings fund for your children or saving for retirement. However, more than likely, the financial plan you built with your financial advisor does not necessarily consider what you want to happen in the event of your incapacity or upon your death.  So, what happens to a Nebraska resident that does not have these important estate planning documents?  

The state of Nebraska, in its generosity, creates a “will” on your behalf, and the laws of intestacy dictate who gets what. But what does Nebraska law really say? Well, that all depends on your then living heirs and the total value of your estate. For example, if you are a married person with no children, Nebraska law says the first $100,000.00 plus one-half of your remaining assets go to your surviving spouse, and the balance of your assets go to your parents. For a married person with children, Nebraska law says the first $100,000.00 plus one-half of your remaining assets go to your surviving spouse, and the balance of your assets get distributed equally amongst your children, so long as all your children are also children of your surviving spouse. 

If these state laws surprise you, or if they do not reflect the plan you envisioned, do not let the State of Nebraska dictate these things for you.  Be diligent in your planning and consider executing these very important documents, not only for yourself, but also for your loved ones. 

When it comes to estate planning, most people are familiar with the concept of a Will. However, in addition to a Will, there are many other essential documents that you should consider, and we will discuss each in greater detail below.  

Last Will and Testament. What comes as a surprise to many is the fact that a Will is much more than just an instrument detailing who you want to inherit your property. A Will is a legally enforceable document stating the “who, what, and when” upon your death. In a Will, you will consider things such as: 

1. How your estate will be distributed;

2. Whether you want to include any bequests to specific individuals or charities, or in the alternative, whether there are individuals you would like to disinherit;

3. Who you want to take care of your minor children, if any;

4. At what age or ages you want your children to receive their inheritance and whether you want to set conditions for asset distribution;

5. Who you want to wind up your affairs and handle your property after death; and

6. Where you want your property to go in the event you die without any living descendants (i.e. children, grandchildren, etc.)

 Power of Attorney. Although this document may take many forms, all Power of Attorney documents allow another person to make decisions on your behalf during your lifetime. Giving a person you trust a power of attorney gives them the ability to advocate for your medical needs or make necessary legal and financial decisions for you.

 An agent under a Durable Power of Attorney for Financial Affairs (“Financial DPA”) is appointed by you to act on your behalf regarding your property, business, and financial affairs, among other things. Your agent is legally permitted to perform acts that you designate, whether that be limited powers, or all powers to the fullest extent allowed under the law.  An example of such powers includes simple tasks, such as paying bills and depositing checks, or more complicated tasks, such as managing your real estate, investments, or business interests. Unless expressly stated in the document, the agent may act even while you, the principal, have capacity.

 Should you not have a Financial DPA in force in the event of an incapacity, it is very possible that your family will need to petition the court and ask a judge to establish a conservatorship for you. In addition to being labor intensive, court proceedings are also costly and typically require the assistance of an attorney.  Oftentimes, the situation that calls for a conservatorship also requires immediate action. Of course, as with all fiduciary appointments, who you name as your agent needs thoughtful consideration, such as whether the person is capable of managing your assets, can be diligent when carrying out actions, and fully understands your wishes.  Furthermore, you must consider who you want to serve as a back-up in the event the primary agent is unable or unwilling to fulfill the role.

 An agent under a Health Care Durable Power of Attorney (“Health Care DPA”) is appointed to make health care decisions for you in the event you are unable to make health care decisions for yourself. If you want the agent to have authority regarding life-sustaining treatment, the authority must be expressly stated in the Health Care DPA.  In the alternative, you may choose to execute a Living Will and expressly state your wishes to refuse life-sustaining treatment.  You may also express your wishes regarding organ donation within the Health Care DPA. 

 If you have questions regarding the aforementioned documents, or are interested in more information about Trusts (which is another highly sought-after method of estate transfer), please reach out to any of Erickson & Sederstrom’s highly knowledgeable and experienced estate planning attorneys at (402) 397-2200.