Origin of Estate Planning and Trusts

The origin of estate planning as an active force in asset conservation can be traced back to the 15th century and the English feudal system. Under that system, the primary property owner or lord of the manor, in exchange for a lifetime of faithful service and allegiance, allowed individuals to hold legal title to portions of his property. When the titleholder died and passed the title to heirs, the common law of that period provided that a monetary payment had to be made to the lord of the manor for the privilege of passing that title.

“Estate planners” during this period assisted titleholders in avoiding the payment of a heavy tribute by passing the title to a carefully selected person, in whom the titleholder had complete trust, with the understanding that the titleholder could use the land during his lifetime. When the titleholder died, the use of the land would be allowed to pass to one or more persons named by the titleholder. This transfer of uses was the beginning of our modern application of trusts. The concept of designating persons to be granted the use of property was the Middle Ages’ equivalent of the power of appointment technique so commonly used in today’s estate planning. Moreover, from this transfer of the privilege of use emerged a clearly defined objective of estate planning still appropriate today: To so arrange the distribution of property from one generation to another as to incur a minimum tax burden, both at death and during life and to fulfill the estate owner’s non-tax objectives.

States Control Estate Transfers

Contrary to popular belief, no individual has a natural right to transfer property to others at his or her death. Estate transfer is a privilege granted by the state, not a right. This is partly because the state has a primary and superior right to property owned by its citizens (a concept known as “sovereign right”) and has the right to take private property for public purposes (termed the right of “eminent domain”). The force of these rights allows a state to prescribe the conditions, terms and limits under which its citizens can transfer property at death. The primary five conditions are as follows:

1. The writing of a valid will, by which an estate owner directs how his or her property is to be transferred. If a will does not exist, ownership and transfer of the property is controlled by the state and the state will determine how it is distributed. The orderly disposition of even the most modest estate requires a valid will.

2. A formal administration of the estate, through which the personal assets of the estate owner are collected and itemized for ultimate distribution. The state’s estate administration laws must be followed.

3. The payment of claims and debts for obligations that were incurred while the estate owner was alive. Furthermore, most states reserve the right to prioritize claims against an estate when its assets are insufficient to cover them all.

4. The payment of a state estate tax, a state inheritance tax or both. Some states levy an estate tax, levied on the right to transmit property at death, which is measured by the value of the estate. An inheritance tax is levied on the right of the heirs to receive property from an estate and is generally measured by the share each heir receives and the degree of relationship.

5. For larger estates, the payment of the federal estate tax. This tax, levied by the federal government, is imposed on the value of the property transferred by the deceased estate owner.

When a person dies without having executed a valid will, that person has died intestate. When this happens, the intestacy laws of the various states prescribe who the heirs shall be, and what portion of the decedent’s property each heir receives.

Attorney Adler focuses his practice on estate planning, wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.