CHAPTER 2

estate and the probate estate are generally less than all property owned; the net estate is less because liabilities are subtracted, and the probate estate is less because many things owned, such as those held in joint tenancy and life insurance, pass outside the probate process. The gross estate will equal or exceed the value of all property owned because it includes all things owned and may also include things that are not owned, such as gift taxes paid on gifts made within three years of the donor’s death. In Chapter 6 we will cover the concepts of the gross estate and the taxable estate in detail.

CONCEPTS DEALING WITH TRANSFERS OF PROPERTY

One of the primary areas of emphasis in estate planning is the transfer of property. This section will cover the terminology used in this area.

Transfers of Legal, Beneficial, or Legal and Beneficial Interests

A transfer or assignment of property refers to any type of passing of property in which the transferor gives up an interest to the transferee. The interest transferred can be purely legal, purely beneficial, or both legal and beneficial. Legal interest refers to a situation where title passes. For example, an independent trustee of a trust takes title to all trust assets in order to manage the trust property, but cannot use it in a manner inconsistent with the trust agreement. A mother who takes title as custodian of a bank account established for her child’s benefit under the Uniform Transfers to Minors Act^[1] has legal title, but the beneficial interest is owned by the child.

On the other hand, a purely beneficial interest occurs when a transferee receives something that carries an economic benefit, but not title. Examples of beneficial interest in property include the temporary or permanent right to possess, consume, pledge, or otherwise benefit from property. If a friend lends you her car while your car is in the shop, you have a beneficial interest in the car without having title. As we will see, a trust beneficiary’s rights are purely beneficial.

Finally, an interest given up by the transferor can be both legal and beneficial, such as where the transferee receives both title and the beneficial interest. An outright transfer occurs when one receives both legal and beneficial interests, without restrictions or conditions, as typically happens when one person gives another a birthday present.

Complete Versus Incomplete Transfers; Property in General Versus a Specific Property Interest

Complete versus incomplete transfers: overview. A transfer of property is said to be complete and irrevocable when it is no longer rescindable or amendable (i.e., when the transferor has totally relinquished all dominion and control over that property). For example, after purchasing this book, at the expiration of the returns period, you have made a completed transfer of money. On the other hand, a transfer is said to be incomplete and revocable while it is still rescindable or amendable (i.e., made without total relinquishment of dominion and control over that property).

Property in general versus an interest in property. To fully distinguish between complete and incomplete transfers, one must grasp the difference between property in general and a specific interest in property. Property in general, such as 100 shares of ABC stock, means the entire asset, whether physical or intangible, including all rights and interests that go with ownership. In contrast, an interest in property means one or more rights to property, such as the right to the first five years of dividends from the 100 shares of ABC stock.

In estate planning, more than one interest in a piece of property may be transferred in a way that highlights the divisibility of the interests associated with property ownership.

EXAMPLE 2 - 1. Tom transfers 100 shares of stock in trust to Terry. The trust terms give Alan the right to all income for five years, followed by Barbara having the right to receive income for ten years, and finally, after 15 years, the trust is to terminate with the trust assets distributed to Carl. Each person has received an “interest” in the stock. Terry’s interest is a legal one (title), Alan and Barbara each have a beneficial one, and Carl’s interest is both beneficial and legal. We’ll take a more detailed look at trusts later in the chapter.

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Complete, incomplete, and partially complete transfers. A transfer of each specific interest in property is either complete or incomplete, while the transfer of more than one interest can be either totally complete, partially complete, or totally incomplete.

EXAMPLE 2 - 2. Continuing with the same facts as above, if Tom retained the right to revoke or amend the entire trust, his transfers of property into trust would be incomplete. On the other hand, if Tom retained the right to revoke or amend only Alan’s interest, the transfer of Alan’s interest would be incomplete, the transfer of Barbara and Carl’s interests would be complete, and Tom’s overall transfer of the stock would be said to be partially complete. Finally, if Tom retained no rights whatsoever over the stock, the transfers of interest to Alan, Barbara, and Carl would all be complete.

When we study gift taxes, it will become clear that this issue of whether a transfer is complete or incomplete is important because gift tax law treats completed transfers, even of just a partial interest, as gifts subject to gift taxation.

Sale Versus Gift

Most commonly, completed transfers of property interests are undertaken by sale, by gift, or by a combination of both sale and gift. A sale is a transfer of property under which each transferor exchanges consideration regarded as equivalent in value. By contrast, a gift is a transfer of property for which the transferor takes back little or nothing of economic value in exchange. The most common methods of making gift transfers are outright and in trust.

A bargain sale. A bargain sale occurs when a person (the transferor) knowingly transfers property in exchange for property with an economic value less than the property he or she is giving up. A bargain sale involves a transfer that is a part sale and part gift. The notion of the bargain sale requires us to define a gift somewhat more broadly than in the last paragraph. Usually a gift is something given with nothing in return; however, a bargain sale is obviously a gift, even though property is received in exchange. Federal tax law treats the actual amount of the gift as the difference between the respective values of the consideration exchanged. Thus, a transfer during the life of the transferor will be either a gift or a sale, with a gift defined to include a bargain sale (i.e., an

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exchange of considerations of unequal value, where the parties know and intend them to be unequal).

Inter Vivos Transfer Versus Transfer at Death

A transfer of property can be inter vivos, meaning that it is made while the transferor is alive, or it can be made at death. Inter vivos is Latin for “among the living.” Transfers at death may be made pursuant to a valid document, also called an instrument, prepared by the owner before death (e.g., will, trust, title by joint tenancy, or insurance beneficiary designation), or pursuant to state law (intestate succession) in the event that no such document exists.

Fair Market Value of Transfer

The value of a transfer is measured by its fair market value at the time of the transfer. Determining fair market value is the subject of several sections in the text. A generally accepted definition of fair market value is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.” The IRS uses this definition in the regulations for valuing gifts and estates.^[2]

BENEFICIARIES

A beneficiary or donee is a person who receives a gift of a beneficial interest in property from a transferor. The transferor is called a donor. Although, in the most general sense, donee and beneficiary are synonymous, in certain contexts one or the other term is more commonly used. For example, the recipient of an outright inter vivos gift from the donor is usually called a donee. On the other hand, the recipient of a bequest by a will or an interest in a trust is usually called a beneficiary. Occasionally, the term donee is used to describe one who has received something without also receiving any beneficial interest, such as where one is given a limited power of appointment, an estate planning tool discussed later.

WILLS, TRUSTS, AND PROBATE

In estate planning, a decedent is a person who has died. When a person dies, property owned by the decedent must be transferred. Each state takes special interest in ensuring that all property owned by the decedent is transferred to the proper parties. State law recognizes certain documents prepared by the decedent (wills, trusts, joint tenancy arrangements, life insurance policies, etc.) as legally binding guides for the proper disposition of the decedent’s property. A will is a written document that expresses a person’s desired distribution of his or her property at death. The person making a will is called the testator. The will is said to make testamentary transfers, and the actual process by which transfer is accomplished is the probate process. At the death of a person, his or her will controls the transfer of property only if there is no guide to the transfer that is recognized as superior. Thus, the will controls property in the decedent’s name alone or held with another as a tenant in common, but not property held in trust or in joint tenancy. Property held in trust will be transferred according to the terms of the trust, not according to the terms of the settlor’s will. Any attempt to transfer joint tenancy property by a decedent co-owner’s will must fail since the right of survivorship prevails over provisions in a will.

A trust is a fiduciary relationship in which one person (the trustee) is the holder of the title to property (the trust estate or the trust corpus), subject to an equitable obligation to keep or use the property for the benefit of another (the beneficiary). The trust instrument is the written agreement between the settlor (the person creating and funding the trust) and the trustee that sets forth for whose benefit the trust is created, how the trust estate is to be managed, its duration, and to whom the corpus must be given when the trust terminates. Trusts are described in greater detail later in the chapter.

Intestate, testate, and partially intestate. If a valid will is found, the decedent is said to have died testate. If the will does not dispose of all the decedent’s property, the decedent is said to have died partially intestate. If no will is found, the decedent is said to have died intestate. However, if all property is disposed of by alternative means (e.g., trusts, joint tenancy), a will may not be necessary, and the absence of a will would not cause any problems as there would be no property without some mechanism of transfer.

In some cases, the moment that death occurs has significance because it determines the rights of beneficiaries, and, quite obviously, it is extremely important if the dying person has authorized organ donations. The Uniform Determination of Death Act addresses this issue by defining death as follows:

§ 1. [Determination of Death]. An individual who has sustained either (1) irreversible cessation of circulatory and respiratory functions, or (2) irreversible cessation of all functions of the entire brain, including the brain stem, is dead. A determination of death must be made in accordance with accepted medical standards.^[3]

Probate and the personal representative. Probate is the legal process of administering the estate of a decedent. The probate estate consists of all property belonging to the decedent for which there is no other mechanism of transfer. Thus, the probate estate is that property whose disposition is guided by either the decedent’s will or the state laws of intestate succession. Generally, probate assets fall into one of three groups: property owned by the decedent as an individual, interests of the decedent held with others as tenants-in-common, and, in some community property states, the decedent’s one-half interest in community property. Some community property states, such as California, no longer require a probate for property going to the surviving spouse whether that property is the decedent’s half of the community property or is the decedent’s separate property. Non-probate assets include property held in trusts or in joint tenancy, the proceeds of most insurance policies on the life of the decedent (unless payable to the decedent’s estate), and most retirement plan assets. Many of these terms will be described later in the chapter.

In probate administration, the judge of the probate court determines the validity of the will, if any, and (after a period of administration) authorizes distribution of the probate estate to creditors and beneficiaries. The court appoints a personal representative to act as fiduciary to represent and manage the probate estate. If the court appoints the person nominated in the will to be personal representative that person is called the executor. In some states, a female personal representative is called an executrix, however the trend is to use the term executor regardless of gender. An administrator is a person appointed by the court to represent the estate of a person who died intestate. At times courts appoint someone other than the person(s) nominated in the will. The person nominated may have predeceased the testator, may be incapacitated, or perhaps is unfit (e.g., is serving time in prison for bank robbery). If the decedent died with a valid will, but the court appoints someone other than the person nominated in it, the personal representative is called an administrator with will annexed.

The word “fiduciary” is derived from the Latin word for “trust.” A fiduciary is a person in a position of trust, loyalty, and confidence, who has the legal duty to act for the benefit of another, putting that person’s interests above his or her own. Besides personal representatives, fiduciaries include trustees, guardians, and agents.

Recipients of probate property. Beneficiaries of a decedent’s probate property are called heirs, devisees, or legatees. An heir is a person who inherits property from a decedent whether by will, intestate succession, or any other mechanism of transfer such as through a trust or by joint tenancy. Heir at law refers to the person (or persons) who have a right to an intestate decedent’s property. This is usually accomplished by defining them as included in the issue of the adoptive parent. Degrees of blood relationship, which are important in determining heirs at law, will be covered in Chapter 4. A devisee is a beneficiary, under a will, of a gift of real property. A devisee is said to receive a devise. A legatee is a beneficiary, under a will, of a gift of personal property. A legatee is said to receive a legacy or a bequest. The trend in modern usage is to use the term bequest for any testamentary gift, whether of real or personal property. The Uniform Probate Code, discussed in the next chapter, uses the term “devise” both as a noun and a verb, to mean a bequest or the act of making a bequest (whether of real or personal property) in connection with transfers by will.

Issue refers to a person’s offspring or progeny, including children, grandchildren, great-grandchildren, and the like. A descendant is one who is descended from a specific ancestor. Thus, the terms issue and descendants are used interchangeably. Most state succession statutes treat adopted children as though naturally born to their adoptive parents.

Types of bequests. Bequests are categorized as specific, pecuniary, general, residuary, and/or class gifts. A specific bequest is a gift of a particular item of property capable of being identified and distinguished from all other property in the testator’s estate, e.g., “I leave all my household furnishings to Sally Ann,” and “I leave my high school ring to my brother Bill.” If the property subject to a specific bequest is sold, given away, or lost before the testator’s death, under the common law doctrine of ademption (from the Latin ademptio - a taking away) the bequest fails, meaning the person does not receive anything to replace the missing property. Although most states follow the common law doctrine, some states’ statutes have exceptions that do not result in ademption in certain circumstances, e.g., an asset was acquired by the decedent in a manner that made it clear it was intended to replace specific devised real or tangible property.^[4] A general bequest is a gift that can be satisfied out of the general assets of the estate, e.g., the bequest “I leave 10 percent of my estate to my brother Henry.”

At common law the term legacy meant a testamentary gift of money; however, it has come to mean any bequest. Pecuniary bequest is the term used to describe a bequest expressed as a specific dollar amount. It is called a pecuniary bequest even though the executor has the option of satisfying it with cash or with assets worth the specified dollar amount. Since the bequest could be paid from any account, or be satisfied by the transfer of any asset not specifically bequeathed, a pecuniary bequest is a type of general bequest. Pecuniary bequests are commonly found in complex estate plans aimed at minimizing death taxes. The bequest is likely to be expressed in terms of a formula, such as “I leave to my spouse the least amount needed to reduce my death taxes to zero.” A pecuniary bequest is distinguished from a fractional share bequest, which uses fractions (or percentages) in defining the interests of beneficiaries to certain property or to a portion of the estate (e.g., “I leave 65 percent of the residue of my estate to my sister Gladys, and the other 35 percent to my brother Marco.”)

What remains of the estate after all the foregoing bequests are taken into account is called the residue of the estate. A residuary bequest is a gift of that part of the testator’s estate not otherwise disposed of by the will, e.g., “I leave the rest of my estate to Robert Moon.” Generally, debts are paid out of the residue and not charged against the specific bequests.

A class gift is a gift to a group of individuals that may not be completely defined at the time the gift is made (e.g., “I leave the residue of my estate to my grandchildren living at the time of my death.”)

Occasionally, a testator dies leaving insufficient assets to satisfy all bequests and pay all creditors. Under the procedure called abatement, bequests are eliminated or reduced so that all debts (and administration expenses) are paid in full, or else the estate is exhausted. In those states that follow the Uniform Probate Code (UPC), shares of the beneficiaries abate in the following order: (1) probate property not disposed of in the will, if there are no residuary bequests, (2) residuary bequests, (3) general bequests, and (4) specific bequests. Some state statutes abate gifts to a spouse, or to issue, only after abatement of gifts to persons not related to the decedent.

EXAMPLE 2 - 3. Lawrence died in a UPC state. Lawrence’s will leaves his car to his son, Sam, $20,000 cash to his sister, Vira, and the residue of his estate to his wife, Mary Ellen. Assume that at his death Lawrence owned only the car and $25,000 in cash, and he owed $6,000 in debts. Most states (perhaps all) would require the $6,000 debt be paid, leaving just $19,000 in cash. The UPC abatement would result in Vira getting the $19,000 balance, the car would go to Sam, and Mary Ellen would receive nothing.

Disclaimers

Most people would welcome a large bequest, especially if it came from a distant relative. After all, such gifts may make for financial security. Yet there are times when it makes sense for a beneficiary to refuse a gift or bequest. A disclaimer is an unqualified refusal to accept a gift or bequest. Disclaiming may be preferable when it avoids, reduces, or delays transfer taxes. Usually, a person will disclaim property only if it will then pass to a person the disclaimant wants to have it.

To be tax-effective, the disclaimer must meet the requirements of both state property law and federal tax law. Under property law, a disclaimant is treated as having predeceased the decedent-donor. Consequently, the disclaimed property will pass under one of two possible sets of legal guidelines. Either it will pass to the “alternate taker” in accordance with the terms of the decedent’s transfer document (which is usually a will or trust) or, if no such document exists or if the document does not name an alternate taker, the property will pass under laws of intestacy.

EXAMPLE 2 - 4. Bachelor Barry died recently, and his will left an estate valued at $500,000 to his brother Mike, if living, otherwise to Mike’s issue. Mike, age 87, wealthy and in poor health, has three living children. If he immediately disclaims the inheritance, it will pass under the will to his children. The transfer will not be treated as a gift from Mike, but rather as though it passed to them directly from Barry.

EXAMPLE 2 - 5. Changing the facts in the previous example a bit, assume Barry’s will stated that if Mike predeceased Barry, then the bequest would go to Barry’s long time friend Charlie. If Mike disclaims, Barry’s estate will pass to Charlie rather than to Mike’s children. Of course, Mike could assign his interest in the estate to his children, but that would be a gift from him to them.

A disclaimer is considered to be tax-effective if it complies with the requirements in IRC § 2518 so the transfer is not treated as a gift by the disclaimant. When we take up estate and gift taxes, we will cover in detail the requirements for a tax-effective disclaimer, and we will illustrate ways in which disclaimers are used to improve estate plans.

LIFE INSURANCE

A life insurance policy is a contract in which the insurance company, in exchange for the payment of premiums, agrees to pay a cash lump-sum amount (called the face value or policy proceeds) to a person designated in the policy to receive it (the beneficiary) on the death of the subject of the insurance (the insured). Usually, the policy names alternate beneficiaries who will receive the proceeds if the named beneficiary dies. One other important party in the life insurance contract is the owner, who has title to the policy, and who generally possesses both legal and beneficial interests in the policy. As beneficial owner, the policy owner has the right to benefit from the policy. Beneficial rights usually include the right to receive policy dividends, the right to designate and to change the beneficiary, and the right to surrender the policy. These rights can have economic value, even before the death of the insured. Whether a life insurance policy has economic value prior to the insured’s death depends on the type of policy. If the owner holds title to the policy as the trustee of an irrevocable life insurance trust, then the owner will have legal title but will most likely not have a beneficial interest. Irrevocable life insurance trusts are used to keep life insurance proceeds out of the estate of the insured. Such trusts are discussed in detail later.

Most term life insurance policies have minimal cash value prior to the death of the insured because the premium charged, which increases over time along with the increasing risk of death, simply buys pure protection. If the insured dies during the policy term, the company will pay the face value; otherwise, it will pay nothing. Some multi-year term policies (called level term) have a constant premium for a stated period (e.g., five or ten years). This requires a cash build-up during the early years of the period which is used to pay the higher mortality risk in the later years.

In contrast to a term policy, a cash value policy accumulates economic value because the insurer charges a constant premium that is considerably higher than mortality costs require during the earlier years. Part of this overpayment accumulates as a cash surrender value, which, prior to the death of the insured, can be used by the owner in one of two ways: (1) at any time the owner can surrender the policy and receive this value in cash, or (2) the owner can request a policy loan and borrow up to the amount of this value.

Life insurance makes a significant contribution to estate planning because a policy can have value prior to the insured’s death, can pay cash to the beneficiaries on the insured’s death, and can be structured to avoid estate tax. It is said to be the only asset that can create an instant estate of substantial magnitude for a person of otherwise modest wealth. For a family that includes dependent children, this may be an important means of assuring the financial well-being of the surviving family members if a parent dies. For the wealthy family, life insurance may provide needed cash to pay the death taxes. A discussion of the types of life insurance and irrevocable life insurance trusts is found in Chapter 15. To use life insurance properly, the planner must be aware of the impact of taxes, a subject explained in detail in Chapters 5 through 8.

TAXATION

In estate planning, the two principal types of taxing authorities are the individual states and the federal government. The four major types of taxes are gift tax, death tax, generation-skipping transfer tax, and income tax.

A gift tax is a tax on a lifetime gift; that is, a lifetime transfer of property for less than full consideration.

A death tax is essentially a tax levied on certain property owned or transferred by the decedent at death. There are two basic types of death tax statutes, which, depending on the format, are referred to as either an estate tax or an inheritance tax. An estate tax is a tax on the decedent’s right to transfer property, while an inheritance tax is a tax on the right of a beneficiary to receive property from a decedent. Either way, their net effect is essentially the same: they are both considered death taxes, and the tax is usually paid by the executor out of the decedent’s estate before the property is transferred to the heirs. With an inheritance tax, the amount of death tax paid on any given size inheritance is likely to be greater for remote relatives as compared to close relatives, and greatest for non-relatives. For example, amounts going to a surviving spouse might not be taxed at all, and bequests to a child might have a high exemption amount and/or a lower tax rate than property going to a non-relative. The federal death tax is referred to as the federal estate tax. The characteristic of an estate tax is that, for any given net estate (i.e., after debts and expenses), the tax will be the same regardless of who receives it. For example in the year 2001, the federal tax on a $5 million bequest, after applying a $391,600 federal state death tax credit, would be $1,778,650 whether the estate went to the decedent’s children or went entirely to non-relatives.

However, the federal estate tax is not a pure estate tax because it has two deductions based on the status of the beneficiary. A complete marital deduction is allowed for all property going to a surviving spouse (for a non-USA citizen spouse a special trust might be required, but we’ll save that discussion until later), and a complete charitable deduction is allowed for property going to qualified charities. Since these are complete (100%) deductions, subtracted from the gross estate before arriving at the taxable estate, and they are the only two deductions based on the character of the beneficiary, little is lost in our thinking of the federal death tax as an estate tax.

At the state level, most states impose an estate tax and others have an inheritance tax. The trend is to impose an estate tax that results in no additional cost to the estate because, although it is paid to the state, the state death tax statute sets the death taxes as equal to the state’s allowable share of the federal state death tax credit. Because of the federal credit for state death taxes, this so-called “pick-up tax” reduces the federal death tax by an equivalent amount (i.e., a dollar-for-dollar credit), thus there is no increase in the combined taxes. The calculation for the “pick-up tax” is explained in Chapter 5. Thirty-three states (including California, Florida, Nevada, and New York) use the “pick-up tax.”*** Query 1. Based on the above discussion, what is the death tax collected by the state of Florida if one of its citizens dies in 2001 leaving a taxable estate of $5 million?

A generation-skipping transfer tax is a tax on certain property transferred to someone who is more than one generation younger than the donor - a “skip person.” Thus, the surviving spouse and the children of a decedent are not skip persons, but grandchildren and great-grandchildren are. Without this tax, wealth could skip several generations and escape one or more levels of transfer tax. For example, without the GSTT, a gift or estate transfer of a $10 million parcel of land to a grandchild would be subject once to a gift tax or death tax, but it would not be taxed twice. It would be taxed twice if it went through the natural succession, i.e., once when the property passes from the client to the child, and again when it passes from the child to the grandchild. Chapter 12 covers the GSTT in more detail. It is enough to say here that the federal generation-skipping transfer tax has a $1 million exemption per transferor, making careful planning

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in this area necessary only for clients with fairly substantial estates. Indeed, recent legislation dramatically increases the exemption during the period 2004-2009 and eliminates the GSTT entirely in 2010.^[5]

An income tax is essentially a tax levied on income earned by a taxpayer during a given year. Income tax laws usually distinguish five different taxpayers or entities that must report income by filing income tax returns: individuals, partnerships, corporations, estates, and trusts. Principles of taxation can differ substantially for each. For instance, partnerships generally do not pay income taxes because the partnership is treated as a passthrough entity, income and deductions are passed through to be reported by the individual partners. Each taxpayer, including partnerships, must submit an annual income tax return that reports certain items including income, deductions, credits, and the tax due (calculated by using tax tables applicable to that entity). Married individuals may file a joint income tax return in which they report their combined income, deductions, and other information on one return. This textbook will not try to cover income taxes in detail as it is beyond the scope of this course; however, a good introduction to the income taxation of trusts and estates is found in Chapter 8.

PROPERTY INTERESTS

Estate planning seeks to preserve and efficiently transfer an individual’s wealth. Wealth is generally thought of as the property a person owns. This section will describe some of the ways in which property can be owned. Essentially, ownership can be classified in the following six ways:

$ The physical characteristics of property (e.g., real versus personal)

$ The extent of ownership interest in property (e.g., fee simple or a life estate)

$ The type of co-ownership (e.g., joint tenancy versus tenants in common)

$ A legal versus a beneficial interest (e.g., property held in the name of the trustee versus a trust beneficial interest)

$ A present versus a future interest (e.g., an income interest in a trust versus a remainder interest)

$ A vested versus a contingent interest (e.g., outright ownership of land versus a contingent remainder interest, where the remainderman must outlive the income beneficiary or the trust property reverts back to the trustor’s estate)

Classification of Property by Physical Characteristics

Property is classified as real or personal. Real property includes ownership interests in land and any improvements, such as buildings, fences, trees, and the like, that are attached to the land. Curiously, an interest for years (a leasehold) in real estate is considered personal property. Accordingly, a good functional definition of personal property is all property except interests in land and its improvements.

Property is further divided into tangible and intangible property. Something is tangible if it can be perceived by the senses as having a physical existence. Tangible personal property is personal property whose utility comes primarily from its physical characteristics rather than the legal rights conferred on the owner or possessor of the property. Conversely, intangible personal property derives its value from the legal rights it represents. Thus a newspaper is tangible personal property because its value is based on the news printed therein. Initially, one might pay 35 cents to read it. A few days later, the value may drop to almost nothing, being useful only to wrap dead fish or as recycled newspaper. Yet, a very old paper with an article of historical significance on the front page may be worth a lot to collectors of old newspapers. On the other hand, a stock certificate is valuable to the owner of the certificate if the company is a going business, not because of the physical characteristics of the paper it is printed on, but because of the rights it represents, such as the right to vote for the board of directors, the right to dividends when they are declared, and certain liquidation rights. If the company has gone out of business, then the stock certificate has become tangible personal property. The certificate may be worth only the value of the paper it is printed on, or, if it is old or unusual for some reason, it may be of some value as a collector’s item.

Intangible personal property includes a chose in action, which is a claim for money or property that could be recovered from another in a lawsuit, if such is necessary. A chose in action, pronounced “shows,” represents the right to money or property that is owed to the holder of the chose. That right can be transferred, sold, or assigned to another, who can then act on it in his or her own name. The person holding the chose as a result of a transfer is entitled to keep any recovery.

EXAMPLE 2 - 6. Betty borrows $9,000 from Lenny, agreeing to pay it back by December 31 of this year. Lenny signs a piece of paper assigning to his daughter, Christine, his right to collect the debt. Since the debt could be collected by a lawsuit if necessary, it is considered to be a chose in action, and the assignment to Christine gives her the right to collect it.