South Florida Estate Planning Law : Florida Estate Planning Lawyer & Attorney : David Shulman Law Firm : South FL Wills & Trusts

I am both fascinated and touched by this New York Times Story about Yitta Schwartz, who when she died last month at the age of 93, possibly had 2,000 living descendants. According to the article, Mrs. Schwartz, a member of the Satmar Hasidic sect, had 15 children, more than 200 grandchildren, and too many great and great great grandchildren to count. I don't want to plagiarize the article, but I highly recommend that you read it yourself, to see this remarkable story of a Holocaust survivor and her family.

As far as the estate planning angle? Just imagine if she in her will made a class gift to her grandchildren, or to her great grandchildren. For example, if her will said, "I give $100 to each of my grandchildren." Or, even if she gave property to her children or grandchildren on a per stiprital basis, in which younger generations stand in the shoes of their deceased parents. It would be quite a task for whoever is administering the estate to categorize and find all of those relatives. Then again, from the article it appears as if almost all of them are living in the same area.

• Email This
• Print
• Comments (1)

One thing that makes our country both great and frustrating is that for certain types of law, there are often different, incompatible, conflicting laws that vary by state. On occasion, various committees are formed to draft "Uniform" Codes, but it is still up to the individual state legislatures as to whether or not they should be adopted, and what changes are to be made before they are.

One such area of law in which there are a wide variety of rules is the probate law.

I was reading an article on the Wealth Law Blog, the blog of Samuels, Yoelin, Kantor, Seymour & Spinrd LLP in Portland, Oregon. In an article titled, "Don't Write Off Holographic Wills," the author, Victoria Blachy writes that under certain circumstances, a handwritten will may still be valid, because of certain backdoor rules. She write "many states (let's label it "State A") recognize that a will executed in a foreign state ("State B"), pursuant to the laws of State B when executed, can also be valid in State A. For example, see ORS 112.255(1)(c) and RCW 11.12.020. This can come into play when you are dealing with states that recognize holographic (handwritten) wills, like California, and states that do not recognize such wills, such as Oregon and Washington."

I am not licensed to practice law in either California or Oregon, so I'll be talking about Florida law. But first, I think we need to define what exactly a "holographic" will is, as it sounds like something that Mr. Spock would enter into the Enterprise's log before being killed fixing the warp core. A holographic will is a will that is entirely in the Testator's handwriting and signed by the Testator. No typing, no writing.

In Florida, in order for a will to be valid, section 732.502 of the Florida statutes provides that in order for a will to be valid it has to be signed (or acknowledged) at the end by the testator in the presence of two witnesses who must be in the presence of the testator and the presence of each other when signing. If there are two witnesses, but each sign separately, and do not see both each other and the testator sign, then the will is invalid.

In her post, Ms. Blachy points out that often states have a rule that if a will executed by a resident of another state would have been valid in that state at the time it was executed, then it will be valid in the new state too. Florida has a similar rule. For example, let's Michael executes his will while he lives in a state that only requires one witness and not two. If Michael later moves to Florida, then that will will be valid in Florida also. Under the Florida Statute 732.502, "Any will, other than a holographic or nuncupative will, executed by a nonresident of Florida, either before or after this law takes effect, is valid as a will in this state if valid under the laws of the state or country where the will was executed."

In other words, in Florida, even if a Holographic will would have been valid in another state, it still will not be accepted in Florida. Of course, if the will is properly witnessed, then it is valid either way.

PS. A "nuncupative" will is an oral will. They're not valid in Florida either, even if videotaped or put on YouTube.

• Email This
• Print
• Comments

The Year Without an Estate Tax continues.  

As I have previously written, due to Congress's extreme irresponsibility and inability to get anything done at all, the Estate and Generation Skipping taxes are repealed in 2010, but for one year and one year only.  Last December, in a post entitled, The Real Danger of the Expiring Estate Tax: Existing Documents, I discussed that the biggest concern among estate planners is that none of the documents that we've been drafting for clients make any sense.  They don't "work."

The problem is that the dispositions of property in the documents are often worded in such a way that they take the estate tax into account.  Take a look at the following examples that might be found in an existing Will or Trust:

1. "I give to my children an amount equal to my remaining estate tax exemption, and give the balance of my estate to my spouse."
2. "I direct that my Personal Representative set aside an amount equal to my remaining generation skipping tax exemption, and said amount shall be held in trust for my grandchildren."  
3. "I give to the United Way the minimum amount necessary to reduce my estate tax liability to zero, with the remainder of my estate to be equally divided among my children."

If there is no estate tax, then if each of the above formula dispositions are literally followed, then they will result in a disposition of the estate that the testator did not intend.  Although the estate tax is federal law, the interpretation of wills and trusts and other documents is state law.  So, like usual, the states are left to deal with Congress's irresponsibility.

I saw, via, Miami Attorney Juan Antunez's Florida Probate & Trust Litigation Blog, the Forbes Magazine article, States Race to Clean up Congress's Estate Tax Mess.  The article explains that the lapse in the estate tax could, "lead to the unintended disinheritance of spouses, which could in turn lead to expensive legal fights among family members and, ultimately, the impoverishment of some widows or widowers."  Apparently, various state legislatures are introducing legislation to try to insert some sanity -- or at least a roadmap -- for fixing these problems.

For the full text of Florida's proposed fix, along with a copy of Florida Attorney Bruce Stone's presentation from the Heckerling Institute, see Juan's blog.  Below is some selected language from Florida's proposed fix:

1) Upon the application of a trustee or any qualified beneficiary of a trust, a court at any time may construe the terms of a trust that is not then revocable to define the respective shares or determine beneficiaries, in accordance with the intention of the settlor, if a transfer occurs during [a time when the tax is repealed] and the trust contains a provision that:

(a) includes a formula devise referring to the "unified credit", "estate tax exemption," "applicable exemption amount," "applicable credit amount," "applicable exclusion amount," "generation-skipping transfer tax exemption," "GST exemption," "marital deduction," "maximum marital deduction," or "unlimited marital deduction;"

. . .

(3) In construing the trust, the court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and the settlor's probable intent. In determining the settlor's probable intent, the court may consider evidence relevant to the settlor's intent even though the evidence contradicts an apparent plain meaning of the trust instrument.

• Email This
• Print
• Comments (1)
• Trackbacks

On February 3, 2010, the Tax Court released it's decision in Estate of Shurtz v. Commissioner,

This case is interesting for a number of reasons.  First, even though it involves a family limited partnership, the case is not about the estate taking substantial discounts.  In fact, the word "discount" is not even mentioned in the decision.  Here, the IRS tried to argue that under section 2036, the full value of all the underlying assets contributed by the Decedent to the partnership should be included in the Decedent's gross estate, and not the value of her proportionate, possibly non-discounted partnership interest.  Additionally, this case involves the value of the partnership interest after the death of the first spouse, in which the entirety of the estate was transferred to either a credit shelter trust or a marital deduction trust, thus resulting in no tax due.  

I'm a bit surprised that the IRS took this, a pure 2036 non-discount case to trial, as the evidence of a non-tax business purpose is so clear.

Background

The Decedent, Charlene B. Shurtz, was an heir to a very wealthy and religious family, the Barges, (not related to El or Chico De Barge).  The Barge's assets primarily consisted of timberland in Mississippi.  In 1993, at least 14 members of the Barge family owned separate undivided interests as tenants in common in thousands of acres of timberland, either outright or in trust.  Even if the estate tax didn't exist, any competent business or probate attorney would advise the family that this type of ownership is a serious mistake, fraught with risks.  The property could be subject to the creditors of individual owners.  Plus, the joint management of property owned by so many people is burdensome and unwieldy.  Thus, based on an attorney's (correct) advice, they established Barge Timberlands, L.P., a limited partnership, to operate the family timber business.  The Decedent owned a 16 percent interest in the Timberlands LP and also 1/3 of the shares of the Corporation that served as the general partner.

The Timberland partnership agreement provided that the partnership would distribute 40 percent of its income each year to the partners, so that the partners would have funds to pay the taxes on their distributive share of flow through partnership income.  

The Decedent, along with her siblings and fellow partners were still concerned that individual family members could, due to Mississippi "Jackpot Justice," lose their interest in the Timberland Partnership, and control of the family business.  The various family siblings were advised the if each of them contributed their Timberland Partnership interests to a separate partnership, then that would provide better creditor protection because the distributions could be locked into the new partnership, and a creditor would not be entitled to receive anything but a charging order.  In addition, the Decedent wanted to make gifts of the family timberland business to her children.

The Doulos Family Limited Partnership

Thus, she and her husband formed a new limited partnership, Doulos LP, in November 1996.  The purpose of Doulos LP was to reduce the estate, provide asset protection, provide for heirs, and in this deeply religious and charitable family, "provide for the Lord's work."  The Doulos LP agreement had language that restricted an outsider from owning an interest, language that was presumably absent from the Timberland LP Agreement.  In addition, the Decedent still owned 748.2 acres of Timberland outright and in her own name only that was not contributed to the Timberland LP, which held previously jointly owned Timberland only.

Before the Doulos Partnership could be established though, there was a problem.  The Decedent owned 100% of everything that was going to be transferred to the Partnership.  Thus, she first transferred a 6.6 interest in her 748.2 acres to her husband, and then the two of them contributed their interests in the timberland, plus her interest in Timberland LP to the Doulos Partnership.

Over the next four years, she made a total of 26 gifts of .4 percent limited partnership interests to her children and to trusts for her grandchildren.  Each gift was valued at $19,700 or less. The Doulos partnership maintained accurate capital accounts for each of its members and filed a Form 1065, a partnership tax return every year.  The entire family actively participated in managing the Timberland LP and the Doulos LP, having annual meetings and consulting family members before any major decisions were made.

The Decedent's Estate

Upon Mrs. Shurt's death, her gross estate was valued at $8,768.05.03, with $7,674,143.03 going to trusts qualifying for the marital deduction, and according to the decision, $345,800 going to a credit shelter trust.  Her Form 706 was filed eight months late, but as there was no tax due because of the use of credit shelter/marital deduction trusts, her lawyers were not that concerned.

The IRS argued that the full value of all of the assets contributed by the Decedent to the Doulos Partnership are included in her estate under section 2036, and not the value of the Partnership interest itself, despite the gifts of partnership interests to her children and grandchildren because the IRS contented that she retained control, use, and benefit of the assets within the meaning of section 2036 and 2035 (some of the transfers were within 3 years of her death).

The Court's Decision

The decision does not state what evidence the IRS used to argue that assets should be included in the Decedent's estate under 2036, probably because there was not much there.  The Court pointed out that section 2036 causes property to be included in a decedent's gross estate if three conditions are met:

1. The decedent made an inter vivos transfer of property;
2. The decedent's transfer was not a bona fide sale for full and adequate consideration; and
3. the decedent retained the possession or enjoyment of, or the right to the income from the property, or the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or income therefrom.

The Court, citing Estate of Bongard and Estate of Bigelow, pointed out that, "the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership, and the transferors received partnership interests proportionate to the value of the property transferred. The objective evidence must indicate that the nontax reason was a significant factor that motivated the partnership’s creation."

As the facts provided, there were several non-tax reasons for establishing the Doulos partnership, including protection of assets and providing centralization of management.  Additionally, these were not deathbed transfers, and the Decedent maintained sufficient assets outside of the partnership to live her life.  Additionally, in order to satisfy the "full and adequate consideration" prong, she had to receive a proportionate partnership interest in exchange for her contribution.  This she did.  Both she and her husband each received partnership interests that were valued in proportion to what they separately contributed to the partnership.

Because the transfer of the assets to the partnership were a bona fide sale for fair and adequate consideration, they were not includable in her gross estate under section 2036.

Take-away

The IRS is still actively pursuing family limited partnerships, discounts or not.  Family limited partnerships that are shams will not stand up in court.  However, as long as taxpayers have legitimate non-tax business purposes for establishing the partnership, and they make sure that they keep adequate records in both the formation and operation of the entity, then section 2036 should not apply to the transfers. 

• Email This
• Print
• Comments
• Trackbacks

President Obama released his 2011 proposed budget yesterday.  In it, the estate tax will be returned to the 2009 levels of a $3.5 million exemption and a 45% rate.  Of course, a budget proposal is just that.  

Stay tuned

• Email This
• Print
• Comments (1)
• Trackbacks