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

On November 29, I wrote a blog post about 3 Connecticut wealth managers winning $254 million in the Powerball lottery. At the time, I found it curious that all three of them were accepting the prize through a trust, known as the Putnam Avenue Family Trust.

I speculated that the "Putnam Avenue Family Trust is merely a temporary holding entity. After the trust collects the funds, it will then shortly thereafter distribute the shares among the three winners (or their newly formed legal entities)."

Then, responding to media speculation, I asked in a subsequent post whether or not they were using the trust to hide a fourth or real winner. 

Now, it looks like I was right the first time.

In a New York Times Article titled, "It's Official: 3 Asset Managers Will Share Huge Jackpot,"  it is revealed that the beneficiary of the Putnam Avenue Family Trust "has been revealed as a second entity, called the Western Putnam Avenue Trust" and the "three men have stated in an affidavit that they are the only beneficiaries of that trust, which will receive all the assets held by the first trust when it expires on Nov. 22, 2012."

Their lawyer stated what I initially thought, that "his three clients were not hiding anything, and that the trust structure was intended for privacy and to give the trustees certain options for planning their estates."

No conspiracy, just smart planning.

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 I have previously written about the already rich Connecticut money managers who won $254 Million in the Powerball Lottery, and joined in the speculation as to whether or not there was a hidden fourth winner. 

I'm still not entirely sure as to why they chose to accept their winnings in a single trust, but I'm glad to see that they are starting to do some good.

According to the Wall Street Journal, they have given $1 million to various veterans' service organizations. 

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I saw this story this morning that made me shake my head in wonder, and in a little bit of jealousy. Apparently, three money managers from Greenwich, Connecticut won $254 million in the Powerball lottery. If you don't know, Greenwich is a New York City suburb and one of the richest in the country. Apparently, the three money managers are the founder and employees at an $82 million wealth management firm. So these aren't the typical lottery winners - a 63 year old married couple from Des Moines where he insists that he is not going to quit his job at the tractor factory.

According to the story, the winning numbers were drawn on November 2, but the three men didn't come forward until yesterday. Also, “the three men will accept an after-tax payment for their winnings of about $104 million and collect it through an entity that they formed called the Putnam Avenue Family Trust.”

The Putnam Avenue family trust? What the heck is that? And why did he wait so long to come forward?

Aha! An estate planning angle.

There are a number of reasons that lottery winners should elect to be paid through an entity such as an LLC or Partnership. Generally, instead of having one individual win the lottery, their entire family claims it through a partnership that they formed, with family members having varying interests in the entity. This allows for there to be lower income taxes, because each person gets to take advantage of their lower marginal rate first. Also, it can help effectuate estate planning by reducing the number of intergenerational transfers and locking up the assets in a creditor protected entity.

But there are a few things about this case that I don't know. It is a bit unusual to collect the winnings in a trust and not a limited partnership or limited liability company. A self-settled trust generally does not really provide any layer of asset protection. Furthermore, there are three separate families here. Why did all three of them have the funds distributed to one trust instead of dividing it equally between them beforehand? You would think that each person would want to have their own share for their family. Again, each of the three of them shouldn't have collected the money directly, but each through a family entity.

Here is what I suspect though, and it's actually pretty smart on their lawyer's part. I would guess that the Putnam Avenue Family Trust is merely a temporary holding entity. After the trust collects the funds, it will then shortly thereafter distribute the shares among the three winners (or their newly formed legal entities). What are the names of these new entities? Where were they formed? What do they provide? We don't know, and that's the point.

Smart planning.

Lucky bastards.

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According to the New York Times, "Joe Paterno transferred full ownership of his house to his wife, Sue, for $1 in July, less than four months before a sexual abuse scandal engulfed his Penn State football program and the university."

Why would he do that?

The short answer is I don't know. But it is fun to speculate.

Of course, I use the word "fun" in the loosest possible terms. This is a horrible situation that is not fun for anyone.

As we all know, there is currently a  "child sex abuse" (really, child rape) scandal engulfing Penn State University. I will let the criminal law bloggers talk about the crimes that Sandusky will be accused of, and the possible criminal liability of other parties involved. Then I will let the civil litigation bloggers, the education law bloggers, and the insurance bloggers talk about the potential civil liability of Joe Paterno, and the university itself.

Me? I am a tax and trust estate blogger (at least sometimes) so I will talk about that issue.

There are a few possible reasons why Joe Paterno would transfer his house to his wife. The first, is "asset protection." The second is "elder law" or "Medicaid" planning. The third is more general estate planning and tax planning. I will take each in turn.

First, a caveat.  Many of these issues are specific to state law. I am not a Pennsylvania attorney. It is possible that there are unique Pennsylvania related issues that I will completely get wrong.  If so, please feel free to correct me.

The article states, "Two lawyers examined the available documents in recent days. Neither wanted to be identified because they were not directly involved in the case or the property transaction. One of the experts said it appeared to be an explicit effort to financially shield Joe Paterno. The other regarded the July transaction, at least on its face, as benign."

This kind of annoys me. If the New York Times has access to the documents, why not publish them, or link to them on its website so we can decide for ourselves? Reporters often get these issues wrong because they do not understand what they are seeing

The implication of the New York Times article is that Joe Paterno was concerned about being sued in the sex abuse scandal, and therefore is transferring his assets to his wife so that they will be protected from future creditors. Otherwise why would it even be a story?

As I have written in the past, in Florida, your house is your Homestead and is generally protected from creditors. If Joe Paterno lived in Florida, it would be very unlikely for his creditors to be able to attach the interest in this house. Furthermore, in Florida there is ownership as tenants by the entireties. Under tenancy by the entireties, if you own property with your spouse, it is not subject to attachment from the creditors of one spouse. It is only subject to attachment the creditors of both spouses.  I am not a Pennsylvania lawyer. However, it appears as if Pennsylvania also has tenancy by the entirety protection. If that is so, then there would be no reason for Joe Paterno to transfer the house to his wife to protect  it from creditors.

The second possible reason for Paterno  to transfer the house away is for what is known as Medicaid planning. Basically there are certain circumstances in which one transfers assets away so that they will be eligible to apply for Medicaid in the future. However, the Paternos have far too much money and probably far too good insurance from the University for this to be a real possibility.

So let's talk about estate planning, and go back to the article.

The article states that "Documents filed in Centre County, Pa., show that on July 21, Paterno's house near campus was turned over to "Suzanne P. Paterno, trustee" for a dollar plus "love and affection." The key word is "trustee."  The fact that it says trustee clearly shows that it was not just transferred to his wife, but to a trust in which she is the trustee. We have no idea what this trust says.

In all likelihood, it is just a revocable living trust. A revocable living trust can be used to avoid probate, because when you die, the trust owns the property and not you. Whether it is his revocable living trust, or his wife's is unclear. She can be the trustee of either, both, or neither. It's also possible that the transfer was to a special kind of tax planning trust called a QPRT, or qualified personal residence trust, which is used to transfer the house to younger generations for tax planning.

Unless I see the documents, I don't know. However, I do think it's far more likely that this was a routine estate or tax planning transaction, and has nothing to do with the ongoing scandal.

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Estate planning attorneys love to beat you over the head with the fact that you need a will. It's one of our favorite pastimes, after late night readings of the latest generation skipping transfer tax regulations.

But what happens if you die without a will? That is what's known as intestacy. If you die intestate, then the law governs how your property is distributed. This law is based upon your marital status and whether you have any descendants.

The law is also significantly changing on October 1, 2011. Under the new law, if the Decedent's descendants are all also descendants of the Decedent's surviving spouse, and the surviving spouse does not have any descendants who are not descendants of the decedent, then the surviving spouse receives the entire estate.

Perfectly clear, right?

Yeah, I know. Not so much.

In the past, I've written about Kelley's Homestead Paradigm, which takes Florida's notoriously complicated laws regarding the disposition of your home upon your death, and makes it understandable through an easy to follow chart. Inspired by Rohan Kelley's work, I decided to make a flow-chart showing how Florida's new intestacy law works.

It's not as fancy as Kelley's Paradigm. I always received bad grades in arts in crafts. But I think it does its job.

PDF Link here.

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Today (July 27, 2011), I was part of a panel that presented an online webinar, "Estate Planning for Digital Assets and Online Financial Accounts." The materials can be downloaded for free from here.

 

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I was talking to someone the other day who wanted to change their Will, which was not originally drafted by me, and asked me if I would do a a codicil for them.

I told them no.

While I would be happy to draft a new will from scratch, I don't do codicils to wills that were drafted by other attorneys, and I generally don't even like doing them to Wills that were drafted by me.

What is a codicil?

Quite simply, a codicil is an amendment to a Last Will and Testament. Instead of drafting an entire new will, a codicil merely amends certain sections of the Will. It could be 4 pages, 3 paragraphs, 2 sentences, or even one word.

Back in the days before computers, or even typewriters, long documents like Wills were drafted by hand. While attorneys often did the creating of the documents, the actual copying and physical writing of the documents were done by scriveners (Ah, Bartleby! Ah Humanity!). As a Will could be, and often was, a document of significant length, it did not make any sense to write out a 20 page document in long hand, just for some minor changes. Enter the codicil.

Eventually, the assembling of legal documents moved from being written out longhand, to being typed on manual (and then electric) typewriters. These typewriters had no memory, So once again, without the ability to do a short codicil, a small change to a Will would require a secretary to retype the entire document, instead of a few pages.

But there are problems with codicils.

First, the law is in a constant change of flux. Congress and the state legislatures are always changing the tax laws and the laws regarding probate and real property. Lawyers have to constantly update the "boilerplate" of their Wills and other documents to conform to the changes in the law. If you do a codicil to a Will in which, for example, the testator excludes one of their children, or adds a grandchild, it's possible that the changes in the law since the last Will will not be incorporated.

While in the past it might have been more efficient to do a codicil that reflects all of the changes, it's certainly not efficient now. Depending on when the Will was drafted, there may be multiple changes in multiple places, or few changes. If it was a document that I drafted, I would at least know where those changes are. But if someone else drafted it, it would take considerable time to pour through the Will and checking the law -- much less time than it would take for me to create a new one that has all of the updated language to conform with the law.

Another issue is the signing of the Will. As I've written about before, How you sign a Will Can Be Just as Important as What It Says . If I did not preside over the execution ceremony, I have no idea whether or not the original Will was validly executed in the presence of two witnesses who were in the presence of each other and the testator. If the original Will is invalid, then the Codicil may also be invalid. It's possible it could be valid by incorporating the prior Will, but again, drafting a new Will is safer.

Finally, in the age of computers, word processors (the computer program, not the human kind), and document assembly programs, there is no reason, for me at least, to do codicils, instead of new Wills. It no longer takes a scrivener or a secretary hours to recreate the document from scratch. Instead, I can use their previous Will to make the changes according to their wishes, and I'll know where to make changes to the law. The rest of it can just be re-printed, and does not have to be recreated.

So why do attorneys still do codicils? Some do it out of force of habit, in that's the way it's always been done. Some are still dictating Wills for secretaries using forms and do not have document assembly programs. And some think that clients prefer a short codicil than a new Will.

But for me, I'd rather be safer and do a new Will, and leave the codicils to Bartleby.

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There's a good story in USA Today today on estate planning and the estate tax entitled, How to leave stocks, bonds, real estate, or small businesses to your heirs. Like most USA Today articles, it takes complicated concepts and puts them into simple terms, including adequate, albeit brief, explantations of the annual exclusion, carry over basis, the estate tax exemption, charitable planning, and business succession planning.

There's nothing "new" in it, but it's always good to get the word out that everyone needs some sort of plan, and to create awareness among the public as to what types of issues they may encounter if they do not plan.

Link: How to leave stocks, bonds, real estate, or small businesses to your heirs.

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Sometimes, posts on law blaws can get a little bit esoteric. Every now and then I think it's useful to go back to the beginning, and set forth the documents that comprise a basic estate plan. Every single adult should have these in place, regardless of age, marital status, wealth, and whether or not they have children. These documents are:

1. Last Will and Testament - Your Last Will and Testament sets forth how and where your assets will be distributed, who will be nominated the personal representative of your estate, and if you have minor children, who will be nominated the guardians of your minor children. Without a proper Will, your assets may pass through intestacy, in which the law dictates who inherits your property instead of you.
2. Durable Power of Attorney - In your Durable Power of Attorney, you nominate a person, who, in the event you become incapacitated, will have the power to make all non-medical decisions for you. They can open your mail, pay your bills, manage your bank accounts, run your business. Everything that you could have done, the appointed attorney can do for you. Of course, you can make the nomination as narrow or as broad as you choose.
3. Designation of Health Care Surrogate - The designation of health care surrogate is like the power of attorney, except that it allows you to designate someone to make medical decisions for you in the event that you are incapacitated. This is not about "end of life" decisions, but the more basic medical decisions that you may be unable to make on your own. Without a Durable Power of Attorney and Designation of Health Care Surrogate, then if you become incapacitated, you might be subject to a "Guardianship." A Guardianship is a process in which the court appoints someone to make decisions for you. It can be extremely costly, and burdensome on you and your family.
4. Living Will - The Living Will contains your instructions, so that in the event that you are in an "end stage" condition, or a permanent vegetative state, you let your loved ones and caregivers know whether or not you wish to be kept artificially alive by machines, or to be removed from the machines and able to die with dignity.

Some estate planning professionals will state that every single person should have a revocable trust. As I've written in the past, while they are good for some people, not everyone needs them.

 

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Now that I've been nominated by LexisNexis to be one of the top 25 Estate Planning Blogs, I'd like to introduce myself to new readers, and possibly re-introduce myself to old ones. I am an attorney in Fort Lauderdale, Florida, with a practice focused on estate planning, asset protection, probate, guardianship, and tax planning. I grew up in a suburb of Fort Lauderdale, known as Plantation, in Broward County.

After graduating South Plantation High School in 1991, I attended Brandeis University, in Waltham, MA for my undergraduate degree, and then I went to George Washington University, in Washington, DC, for law school. Going into law school, I never imagined that I would end up a tax lawyer some day. In fact, it was furthest from my mind. But during the summer between my first and second year of law school, I landed an internship with the Tax Division of the Department of Justice, in a Civil Section. That means that they didn't prosecute criminals who evaded taxes, but instead sued to collect taxes owed. While I didn't necessarily like the litigation side of it, the technical tax side, with its talmudic like detail, fascinated me.

Starting with my second year of law school, I began to take as many tax classes as I could. My basic Federal Income Tax class was taught by Judge James Halpern of the US Tax Court. Having a sitting Judge teach the class is one of those experiences that you can only get in DC, and the real world knowledge that he brought to the class made for a great experience.

After law school I was hired by the Internal Revenue Service Office of Chief Counsel, in the Passthroughs and Special Industries division. There, I specialized in the income taxation of partnerships, subchapter S corporations, and trusts. At the IRS I wrote Private Letter Rulings, Revenue Procedures, Notices, and Regulations. I also worked on the IRS's war against abusive tax shelters, including being the primary docket attorney on Notice 2000-44, the "Son of BOSS" Notice. Although I was in the division that was focused on the income tax of those entities, I worked closely with the division that specialized in the estate and gift tax, and that area always appealed to me.

I stayed at the IRS for seven years. After a while, I got tired of the snow and being cold, and I missed my family and the South Florida community. In 2005, I moved back to South Florida, where I received my Masters in Law (LLM) in Estate Planning at the University of Miami Law School. To me, Estate Planning allowed me the opportunity to be a tax attorney, but also to work with "every day" people. After I finished the LLM program, I then was an associate with a large South Florida law firm for almost three years, at which point I decided to leave and start my own practice.

Which brings us to the present.

I love being a solo practitioner, because it allows me to run my practice the way I want to, and can devote the individual attention to my clients that they deserve.

Thanks for reading, and there is plenty more to come.

 

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Last week I got a frightening phone call. It was the hospital emergency room calling, telling me that my grandmother was there. I won't go into any further details out of respect for her privacy, except to say that she is fine and was discharged the same day. But it was a frightening call nonetheless.

Before I head out the door to go to the hospital, I just had to grab the Designation of Health Care Surrogate that she executed, designating me the person who could make health care decisions for her in case she was incapacitated. I, like the good estate planning attorney I am, made sure that all of her documents are current and up to date. Like I said, I just needed to grab the Designation of Health Care Surrogate, and out the door I'd go.

Now, where did I put it again?

Crap.

Have you ever heard the phrase, "the cobbler's children have no shoes"? Well, when it truly mattered, when I may have needed to run out the door with the documents, I didn't remember where I kept them. That's not very smart.

I eventually found them and went to the hospital. It turned out that I didn't need them anyway. But I have certainly learned my lesson, and will not make the same mistake in the future.

 

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I don't want people to think that I'm obsessed with Michael Jackson.

I'm not. 

However, I am very interested in proper estate planning, and I think that others should be too.  The Michael Jackson case is useful because it can show "ordinary" people what to do and what not to do with regards to their own planning.

Many people do not know what a Revocable Living Trust is, or how they work.  The purpose of a Revocable Living Trust (which I'll refer to as an "RLT") is to avoid probate when you die, and to avoid a Guardianship if you become incapacitated.  That's it.  An RLT does not protect you from creditors.  It does not save you taxes.  It does not do many of the things that non-attorney Trust mills and hucksters claim that it does.  But used correctly, and, if you need one, it can be a powerful tool that is an essential part of estate planning. In brief, a person will transfer ownership and title of their assets while they are alive to their RLT.  Then, upon their death, and if the RLT was properly funded, the RLT will be the owner of the assets and not the individual. Because the Trust owned the property and not the individual, there is nothing to probate (again, if the RLT is properly funded).

In a series of posts, I will examine Michael Jackson's Revocable Trust in depth. Feel free to download the trust document so you can follow along. 

Article One of Michael Jackson's RLT (which I will refer to as the Trust) sets forth some basic information about the Trust -- i.e., it's name, when it was established, that Michael Jackson has the power to amend or revoke it at any time, that Michael Jackson has the power to add or remove property from it at any time, and other general principles.  Michael Jackson is the creator (often referred to as the "Settlor," "Grantor," or in this document, "Trustor"), and he is also the Trustee. That means that while he was alive and able to make his own decisions, he was the only person in control of the Trust. 

Article Two of the Trust provides how the trust property will be managed during Michael Jackson's lifetime.  The Trustee (who is Michael Jackson) shall pay to the Trustor (who is also Michael Jackson) the net income of the Trust and the Principal of the Trust, as needed or on request.   But, if Michael Jackson were to become incapacitated, then a successor Trustee would be appointed in his place to manage the property for his benefit. 

The real meat of the Trust starts in Article Three though, which provides how Michael Jackson's estate will be distributed upon his death.

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Miami criminal defense attorney Brian Tannebaum recently wrote a post on his blog entitled, "Do People Who Aren't Hungry Go to Restaurants?" In his post he states that clients are often shopping for the cheapest lawyer, and recently, people have been contacting him and telling him that they aren't even sure if they want to hire an attorney (even though of course by the time that they contact him, they almost always need a criminal defense attorney).

In the estate planning field, the code word that I often hear is "simple." Potential clients will call and before giving me any information, tell me that they just want a "simple" will and how much will a "simple" will cost them? When someone on the phone says that they are looking for estate planning and want something "simple" they almost always mean "cheap." They'll call around asking multiple attorneys how much each charges for a simple will, and then without asking whether or not that attorney focuses their practice on wills, trusts, and estates, or is someone who does wills, criminal law, personal injury, and a smattering of other areas, will then go with whoever gave them the lowest price on the phone.

Unfortunately, too many attorneys are more than happy, or at least willing to play that game.

First of all, I'm not Walmart.

I'm not interested in offering the absolute lowest price to the highest volume of clients, because it will not allow me to give each client the attention that they need. That's not to say that I overcharge because I don't, but like any professional I charge a fair price for my services.

But more importantly, I don't sell wills. I sell advice. My job isn't to have the client tell me that they need a simple will and then provide it to them. That's what Legal Zoom does with their fill in the blank forms. If the client knew what they needed, they wouldn't have to hire me. I see it like going to the doctor with a searing stomach ache, and telling the doctor "I only want you to give me an antacid. Do not check me for appendicitis."

My job is to examine each and every client's circumstances, including family, children, assets, age, health, citizenship, employment, etc. and after an examination of a multitude of variables, including intangible impressions that I get from a face to face meeting with the client, only then do I advise them what I think they need, and if they decide to follow my advice, begin drafting the documents.

So when someone calls me on the phone and the first thing they ask me is, "How much do you charge for a simple will?" I know that there is a 99% chance that they won't end up hiring me, which is fine. I much prefer the clients who call me and the first thing they say is, "I am interested in doing what I can to protect and provide for my family. How can you help me?"

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Yesterday at my networking group meeting we were visited by a woman who runs a video production company catering towards attorneys. As she was introducing herself to the group, she stated that among the services she provides was filming depositions and allowing people to film video wills.

At which my ears perked up.

Video wills?

I obviously didn't want to interrupt or embarrass her in front of the group, but I was curious exactly what she meant and I went up and spoke with her after the meeting. Sadly, it was exactly what I feared.

One of her services is filming people speaking in front of the camera and saying, "I so and so want to give my bank account to my daughter and. . . " Not writing, but speaking.

Oy vey.

In Florida, video wills are invalid. Inadmissible. Worthless.

Section 732.502 of the Florida Statutes provides, in part that "every will must be in writing." No exceptions.

I'm not talking about recording the signing ceremony, which I'll write about another time. But if your only will is a video will, it's no different than not having any will at all.

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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.

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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.

 

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 Next week I will be attending the 44th annual Heckerling Institute on Estate Planning which is sponsored by the University of Miami Law School.  Heckerling is a week-long conference on estate planning, administration, tax, and other related issues.  This year should be especially interesting because of the current repeal of the estate tax.  

I hope to post blog updates from the conference, especially if I gain any insights as to what is happening with the estate tax.

 

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If you read the tabloids, or even the mainstream press, you may have come across the sad tale of Casey Johnson. Johnson was one of the great-great granddaughters of Robert Wood Johnson I, and an heiress to the Johnson & Johnson fortune. Her father, Woody Johnson, owns the New York Jets.

Johnson's life, to put it mildly, was a mess. A contemporary of Paris Hilton, she had a long history of alcohol and drug problems, public battles with family members, and a recent"engagement" to reality tv star Tila Tequila (if you don't know who that is, do your own internet search. But the images might not be safe for work). The thirty year old woman was found dead in her home on January 4, 2010, leaving behind an adopted four year old daughter. Police are saying that she could have been dead for several days.

I'm sure there are going to be criminal investigations, recriminations, lawsuits, and possibly a messy probate, which I may or may not write about as it happens. For now, I am only interested in one aspect of this: the estate tax.

I don't know what Johnson's financial situation was at her death, I hear that she was "cut off" and broke, but it's also quite possible that she had substantial assets in trust that would be includable in her estate for estate tax purposes, but was beyond her reach for her own protection. This amount could be several million or even tens of millions of dollars.

As I have been discussing, 2010 is currently the year without an estate tax. That means that if Johnson died in 2010, no matter how large her estate was, it will not be subject to the federal estate tax. If she died in 2009, then her estate is taxed at 45% of its value over $3.5 million . If she had a taxable estate of $10,000,000, then her estate will owe $2,925,000 in taxes to the federal government. . I believe (although I do not know for sure) that her death certificate shows the date of death as the date she was found, January 4, 2010. However, if the evidence shows that she died in 2009, then her estate is liable for the tax.

Let's take this one step further. Assume that she did die in 2010. Most people think that Congress is going to retroactively reinstate the estate tax back to January 1, 2010 at some level -- probably the 2009 exemption of $3.5 million. Most legal scholars also believe that it is constitutional for Congress to do so. If someone dies during that time and owes a minimal amount of tax, then it's likely their estate will just pay it, instead of challenging the constitutionality in court, which of course requires hiring attorneys. But if there is enough money at stake, then I wouldn't be surprised if Johnson's estate does challenge it. It would be worth the risk to see how the Roberts, Scalia, Thomas, Alito Court would rule.

Of course, none of this would be an issue if Congress weren't so deadlocked, so incompetent, so unable to get anything at all done. But that's for another day.

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I honestly never believed that it would happen.

I never thought that Congress would actually be this irresponsible.  After all, they've known that it was happening since 2001.  But here we are.  It is 2010 and there is no estate tax.  For now.

What does this mean?

First, remember that in 2009, the estate tax only applied to a person who died owning assets in excess of $3.5 million.  So for most people, it means absolutely nothing.  

However, along with the temporary repeal of the estate tax, there is also a temporary repeal of what's known as step up in basis.  Let me explain.  Generally, when you inherit assets from someone, your basis in the asset is the value at the time of death.  So that when you go to sell the 100 shares of IBM that you inherited from Grandma, you don't have to figure out how much she paid for it.  You only have to figure out what it was worth at the time of her death.

With the repeal of the estate tax, there is also a repeal of the step up in basis rules.  Instead there is "carry-over basis" and a decedent's estate will have $1.3 million of basis to spread around their various assets.  How will this be done?  I don't know.  But the effect is actually a tax increase on estates valued between $1.3 million and $3.5 million.

Then, one  year from now, the estate tax comes back to life with a $1 million exemption, and a 55% rate.  

Of course Congress could change all of this.  Most people agree that they can retroactively change the law to reinstate the estate tax.  I'm sure there will be lawsuits if they do though.  

What is going to happen?  I have no idea and anyone who says they do is lying.  I was so sure that they weren't going to let repeal happen, and I was wrong.  So we'll just have to wait and see.

But don't throw momma from the train just yet.

 

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If the Senate doesn't get its act together, it it looks like it won't, the estate tax is going to expire on December 31, 2009. As I've written many times before, this is just a one year vacation from the estate tax.  It is scheduled to come back with a vengeance on January 1, 2011.  Not only that, Congress can retroactively change it even after January 1 of next year.

What worries me the most however, is not the notion of people throwing momma from the train in order to have their relatives die in a year without an estate tax.  What really keeps me up at night is all of those documents that are already out there that use formula clauses to dispose of the estate.

Remember the following (1) the lifetime exemption is currently $3.5 million; (2) there is an unlimited marital deduction -- meaning you can leave an infinite amount to your spouse tax-free.

Let's look at the following example:

H has $9 million in assets. He is married to W, his second wife, and has three children, C1, C2, and C3 from a prior marriage. H wants to provide for both his wife and his children upon his death, and to pay no estate tax. H's will says:

"A. I give, devise, and bequeath to my wife the minimum pecuniary amount necessary to reduce to zero the federal estate tax owed as a result of my death. 

B. After the distribution set forth in Paragraph A above, I give, devise, and bequeath the rest, residue and remainder of my estate to my children, in equal shares, share and share alike if living, and if not, then to his or her respective issue per stirpes."

If the exemption is $3.5 million, as it is now, then the children receive $3.5 million to split 3 ways, and the wife gets $5.5 million, which because of the marital deduction is not subject to tax. The minimum pecuniary amount necessary to reduce the estate tax to zero means that the kids get the maximum amount of the lifetime exemption. 

Now we're in 2010. H dies. There is no estate tax. The kids hate their stepmother who is younger than all of them. The kids argue that because there is no estate tax, the minimum amount necessary to reduce the estate tax to zero is. . zero! Stepmom gets nothing. Stepmom argues that the polestar of will construction is the intent of the testator, and the clear and unambiguous intent of H was to provide for W and not to give her nothing. (Ignore elective share statutes for this post).

I don't know who wins the above lawsuit but I know one thing. The loser is going to sue the estate planning attorney for malpractice.

And that's just one example of a formula. There are many different variations and permutations.  Every single estate planning attorney uses some sort of formula in their document -- whether pecuniary or fractional; whether based on the lifetime exemption, or the marital deduction.  These documents are all out there, and none of them "work" in a world of no estate tax.

I could advise my clients that they need to change their documents.  

But to what?  Congress is going to change the law.  Maybe.  I think that the documents are going to have at least three sets of alternatives depending on what Congress does.  

And clients already complain that the documents are too long.
 

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I don't think I've taken a posistion on this blog pro or con as to whether the estate tax should be repealed. I have clients who have taxable estates and I have clients without taxable estates. As planning for the estate tax is only a part of what I do, I'll be able to continue to help my clients protect and provide for their loved ones after their deaths, whether the estate tax exists or not. As to the politics of it, well, because of what I do, I can certainly see both sides of the issue.

As I write this, today is November 30, and we still don't know what is happening with the estate tax next year. If you are unfamiliar with the status of the Estate Tax, check out my August 26 post. However, here are the CliffsNotes:

The Lifetime Exemption, that is the amount that you can own when you die without being subject to the estate tax is currently $3.5 million. Any amount over that is taxed at a rate of 45%. Pursuant to a law passed in 2001, on January 1, 2010 the estate tax goes away for one year only.

Pursuant to that same law (passed by a majority Republican Congress and Republican President Bush), on January 1, 2011, the lifetime exemption, that is the amount you can own before you are subject to the estate tax goes to $1 million, and the rate goes to 55%. All of this -- the one year only repeal, and the reinstating of the estate tax at a much lower threshold with a much higher rate happens automatically.

If Congress does nothing it will happen.

Naturally, a situation in which there is no estate tax for one year only, and the following year in which there is a significantly higher estate tax is untenable. Congress is --finally-- working on a solution. The solution that might be voted on this week was submitted by Congressman Earl Pomeroy (D- North Dakota) which would permanantly set the exemption at $3.5 million and the rate at 45%.

Which brings me to the Heritage Foundation.
On their blog, known as The Foundry, author Curtis Dubay writes the following story:

"House Votes to Raise Estate Tax This Week."

In his post he writes, "The bill it will consider, sponsored by Rep. Earl Pomeroy (D-North Dakota), would extend permanently the death tax at its current 45 percent rate and $3.5 million exemption. This extension would be a drastic tax increase since the death tax expires on January 1, 2010." (emphasis added).

That's just wrong. I would like to give Mr. Dubay the benefit of the doubt, but if you go to his post, and click in the link in his post to the Dow Jones Newswires Story on the subject, the very article he links to says "The Pomeroy legislation, backed by President Obama, would cost $233 billion over the next 10 years since it represents a tax cut when compared to current law" (emphasis added by me).

Read that again. Despite the "one year repeal," the House will be voting to lower the estate tax and not raise it.

Of course, I wonder how many of the Foundry readers will actually investigate these facts themselves. I'm all for a healthy debate, but let's keep it honest please.

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I am a bit of an internet nerd, as far as attorneys go.  You may or may not realize this, but attorneys are incredibly slow to adapt to new technology.  They tend to like things the way that they are, and don't want to take the time and effort to learn a new way of doing things, if the old way of doing things already works.

While of course that is a generalization, I think it's a fairly accurate one.

When I left a larger firm to start my own estate planning practice, one thing that I was committed to was using computers and the internet to be more efficient -- both in the way that I serve my clients, and in the way that I market my practice to others.  I was convinced that through "social media" and "social media" alone, I would be able to quickly develop a thriving practice.

I was only part right.  Social media, whether Facebook, LinkedIn, Twitter, Blogs, Digg, and even old-school Listservs is about building relationships with other people.  "If you build it they will come" is not true.  But networking online is not that much different in networking "in the real world."  By communicating with other people, whether in person, through the phone, through email, twitter, of Facebook comments, you get to know them, and develop a mutual trust. 

Sometimes the question is, "how do you find the people that you would like to meet."  This is an important question for both meeting people online, and offline.  In this post I'll focus on online only.  One thing that I do is that I have  a constant search running on Twitter for certain topics, including "Estate Planning" and "Estate Tax."  I hope that I will be able to meet and communicate with people interested in Estate Planning not just here in Fort Lauderdale, but around the country.  In fact, I have already been referred a client from an estate planning attorney in Los Angeles and I have referred a client to an estate planning attorney in Michigan.  

None of this would have been possible without properly using social media.  Before I sent or received the referral, I had already built relationships with the other attorneys.  Which brings me to the subject of today's post.  One of my automatic ongoing searches came up with the following Tweet, "Florida Estate Planning Attorneys: Florida Estate Planning Attorneys, lawyers, lawfirms, real estate, http://bit.ly/7XooVi."  Curious, I clicked the link in the tweet which brought me to this page on Digg.  That page was also entitled "Florida Estate Planning Attorneys."  However, it didn't contain any information.  From there, there was yet another link to this page, which is nothing but a poorly formatted list of attorneys, along with some Google Ads for other attorneys that you can clickthrough.

What did I learn from this internet wild goose chase?  Nothing.  Someone thought it was a good idea to take the time to set up a webpage that is nothing but a list, then set up a Digg page that links to it, and then Tweet a link to the Digg page.  What's the point of that?  While I suspect that some "internet marketer" may be making a few dollars off of the Google internet ad links; or maybe some attorneys had to pay to be listed (I don't know if they did or not).  Either way this is not an effective way to use social media for attorney marketing.  It's just a series of links to a list.  There's no one to talk to; no one to communicate with.  In the end, it's just a billboard or yellow page listing. 

I wouldn't be surprised if some attorneys hired a marketer to do this, and when it doesn't work (it won't), they'll give up and go back to their old ways of doing things.

I'll keep doing things my way though, and I'm always looking forward to meeting new people, whether online or off.

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I admit it.

I'm a procrastinator. I put off things like going to the Dentist, getting my oil changed, or even hanging pictures on my walls. I know these are things I should get done, but I keep putting them off.

I find that many people are the same way with their estate planning. Most people have no documents at all in place. They don't want to think about their mortality, or they don't want to pay an attorney. Or, like me, they are just procrastinators.

They think they have time to get it done later.

While this is true for some people, it's not true for all of us. As you sit around the table at Thanksgiving with your loved ones, think about how important it will be to them that you were able to protect and provide for them in the case of your death. It could give them something truly to be thankful for for years to come.

One more thing, on a totally separate note. As a Miami Dolphins fan, I'd like to wish a very Happy Thanksgiving to leon Lett, wherever he may be.

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I'm not sure how recent this is (I think that some if it is fairly new), but I have just come upon Bankrate.com's 2009 Estate Planning Guide.  It is broken down into four chapters, with an example of an article from each chapter in parenthesis:

1. Planning for Life (8 life stages of estate planning)
2. Planning Techniques (9 key estate-planning tools)
3. Planning for the future (How to split up the family willed home)
4. Estate Planning Resources.

 

 

 

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In my last post, I wrote about the Illinois Supreme Court's ruling in the Estate of Max Feinberg, which, at least in effect, upheld a trust clause that disinherited Max Feinberg's grandchildren if they married a person outside of the Jewish religion. At least that's how the news is reporting it.

I will not be rehashing all of the facts in this post so if you are unfamiliar with them, please see the previous post.

As I previously wrote, the first thing that the Supreme Court did was to clarify, or change what the threshold issue was. Because Max's wife Erla had an unlimited power of appointment in favor of any of Max's descendants, and because she actually executed the power by changing the dispositive provisions in Max's trust, the clause that caused all of the problems in Max's trust was mostly (but not entirely) irrelevant. She could have given all of the property to one son or to just her granddaughters, and she could have done it outright or in trust.

What she did was to eliminate the trust that would have been established by Max's document, which would have provided for income and discretionary principal to the grandchildren for life, subject to the trust being terminated and the assets going elsewhere if the grandchild married a non Jew. Instead, she appointed $250,000 outright to her two children, and each of her grandchildren who, if Max's trust had been in effect at the time of her death, would have had trusts established for them (i.e. the grandchildren who at the time of her death were not already married non-Jews).

I would like to, again, quote the key paragraph in which the court sets forth what it is deciding:

Thus, the question we must answer is whether the holder of a power of appointment over the assets of a trust may, without violating the public policy of the state of Illinois, direct that the assets be distributed at the time of her death to then-living descendants of the settlor, deeming deceased any descendant who has married outside the settlor's religious tradition. In effect, we are not called upon to consider the validity of Max's estate plan as a whole, which would have continued to hold the assets in trust for the benefit of the grandchildren only so long as they complied with the restriction. Rather, we must assess Max's beneficiary restriction clause in conjunction with Erla's directions for distribution."

It's important to note that the beneficiary restriction clause still exists, because upon Erla's death, whether or not a grandchild is married to a non-Jew is used to determine whether or not they inherit. It's also important to note all of the interesting issues that the court did not rule on -- (1) whether the clause is valid if it established a trust for a grandchild only to terminate the trust if he married a non-Jew; (2) what would happen if someone was married to a non-Jew but later got divorced and married a Jewish person; (3) could the court ever decide 'Who is a Jew'. All interesting issues, and all not considered or relevant.
The Court balanced two competing public policy interests -- the right of testamentary freedom vs the right to marry without restriction. But the key point that the Court continued to make was that the grandchildren had no vested rights to inherit at all upon Max's death, or upon Erla's death. Max had given Erla a power of appointment. If Max had died intestate, then Max's children, not grandchildren would have inherited. And it doesn't matter because Erla exercised her power of appointment. At Max's death the grandchildren only had a mere expectancy of inheriting, but no vested right. Therefore, because Erla exercised the power of appointment in such a way that it immediately vested upon her death, and was not subject to subsequent termination, the fact that she chose to appoint the property only to her children and the one grandchild who did not marry outside the religion is valid, and should not be struck down.
While I'm glad that the court reached the right answer, I am a little disappointed that they didn't cover the broader issues. I certainly understand why they didn't though. It seems however, that if Erla hadn't issued her power of appointment, then they would have probably found the clause invalid. I have on more than one occasion drafted trusts for clients that provide just what Max's original trust provided, that if a grandchild married outside of the Jewish religion, the trust would terminate and the property would go elsewhere. I never had a problem with it from either a legal or a moral standpoint.
However, I've been thinking. What if someone asked me to draft a trust which disinherited a grandchild for "marrying someone outside of the white race"? Putting legal issues aside, (Shelly v. Kraemer perhaps?), such a clause would be morally repugnant to me, and I would refuse to do it. Could one make the argument that the "Jewish clause" is the same? I don't think so, for historical reasons, but I can certainly see someone saying so.

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The Illinois Supreme Court ruled today in the Estate of Max Feinberg,

Even though I'm not an Illinois attorney (which means the case does not directly apply to me), I find it very interesting both as a Trusts and Estates attorney and as a Jew. Fort Lauderdale and Broward County have a large, often elderly Jewish population who are engaging in estate planning. I have, on more than one occasion, per my clients' wishes, drafted a will or a trust which provides that descendants are disinherited if they marry outside of the Jewish religion.

The facts of the case are as follows:

Max Feinberg died in 1986. Prior to his death he drafted a standard pourover will and revocable living trust. The trust provided that upon his death, his assets would be split into a standard credit shelter trust and a marital deduction trust. Max's widow, Erla, was the lifetime income beneficiary of both trusts, and had, according to the opinion, "a limited right to withdraw principal," presumably according to certain ascertainable standards.

Upon Erla's death, the property would be distributed to Max's descendants. Fifty percent of the trust estate was to be held in further, separate trusts for Max's grandchildren (or to be more specific, for the descendants of Max's children) during their lifetime on a per stirpital basis. However, and this is the key part, the trust provided that any descendant who married outside the Jewish faith or whose non-Jewish spouse did not convert to Judaism within one year would be disinherited.

I'm cutting the facts very short here, but one of the grandchildren sued, saying that the provision disinheriting someone from marrying outside the Jewish faith should be void as against public policy. For a more thorough discussion of the facts see the case itself, or the lower court opinion.

The lower court opinion held for the grandchildren holding that the trust clause disinheriting someone if they married a non-Jew was void against public policy. The lower court held that under Illinois law the provision was invalid because it seriously interferes with the right of individuals to marry a person of their own choosing. While I think the term "impassioned dissent" is a bit of a cliche, in there was certainly an impassioned dissent in the lower court case. (I highly recommend that you read Justice Greiman's discussion on why this clause should be valid).

The lower court's decision was appealed to the Illinois Supreme Court, and has been closely watched by both Estate Planning attorneys (be they in Illinois, or Fort Lauderdale or elsewhere), and various religious and civil rights groups. As I wrote earlier, the Supreme Court reversed the lower appellate court's ruling and upheld the clause, but for different reasons.

What I did not point out earlier (and I'm a little surprised that the lower courts did not focus on it) was that Max granted his wife Erla a power of appointment, which Erla exercised giving $250,000 to each of her children and grandchildren who would not be deemed to be disinherited by the previous clause. The court changed and clarified the issue that they were deciding on. The Court wrote:

Thus, the question we must answer is whether the holder of a power of appointment over the assets of a trust may, without violating the public policy of the state of Illinois, direct that the assets be distributed at the time of her death to then-living descendants of the settlor, deeming deceased any descendant who has married outside the settlor's religious tradition. In effect, we are not called upon to consider the validity of Max's estate plan as a whole, which would have continued to hold the assets in trust for the benefit of the grandchildren only so long as they complied with the restriction. Rather, we must assess Max's beneficiary restriction clause in conjunction with Erla's directions for distribution."

I'll discuss the Court's decision and the legal reasons behind it in my next post.

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Professor Beyer over at the Wills, Trusts & Estates Prof Blog links to an article in L.A. Times titled, Wrangling over Michael Jackson's Estate could revive sales of online wills.  

While it is a good thing for people who have no estate planning documents to take steps to get them done, an online will is not the right way to do it.  I'm afraid that too many people will order these online wills and then either not execute them properly, which would cause them to be invalid; or they will put improper devises in them.

If you do not have your estate planning documents done, please see an attorney.  The pain and suffering that your loved ones will encounter after your death if you have an invalid will is not worth the few hundred dollars you might save while you are alive.

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 A recent Associated Press article on the Estate Tax provides some basic background information.   Read the rest of the article, with more questions and answers here.

 Q: What assets are included in an estate?

A: The federal estate tax is calculated by adding up the fair market value of what you own — cash and accounts, stocks and bonds, real estate, trusts, life insurance, businesses, personal property like art work or collectibles, and so forth — at the time of your death. In certain cases, it may also include money or property that was transferred during the deceased's lifetime. The total is called your "gross estate."

Then certain deductions may be taken, like mortgages and other debts, and property left to your spouse or to charity. The amount that remains is your "taxable estate."

Q: Who has to pay estate tax?

A: For 2009, up to $3.5 million per person in assets are excluded from the federal estate tax. The value of property above that level is taxed at a rate of 45 percent. An estate worth less than $3.5 million doesn't even have to file a federal return, said William E. Massey, senior tax analyst for Thomson Reuters.

State thresholds vary, and not every state has an estate tax. Check your state's tax department Web site for details.

Besides the first $3.5 million, everything that is left to a surviving spouse is exempt from federal estate tax. The taxable estate may also be reduced by deductions, funeral expenses and any claims against the estate.

In 2010, the federal tax as it currently stands will expire; if Congress does not change the law, there will be no estate tax next year. In 2011, the old exclusion of $1 million returns, and the top rate for holdings above that amount would jump back to 55 percent, where it was in 2001.

Several bills have been proposed in Congress to address the issue, but none has passed yet.

Whether or not a person has a will doesn't affect the tax their estate owes, said Lynette Atchley, an accountant and certified financial planner in Redlands, Calif.

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In contrast to my recent postings about Michael Jackson who appears to have engaged in professional estate planning before his death, there are reports that former NFL quarterback Steve McNair died intestate, or without a will.  His wife (the wife he was cheating on with the woman who killed him) was appointed “administrator” of his estate.  According to reports, McNair had a wife, two children from his marriage to this wife, and two children from a previous relationship.  Instead of being able to decide himself how his property should be distributed, the distribution of his assets is determined by a formula set forth under state law.

I am not a Tennessee attorney, but according to my Internet research, the state’s laws of intestacy provide that McNair’s wife will receive 1/3 of the estate, and his children will divide the remaining 2/3 among themselves.  Also, there appears to be an “elective share” rule in Tennessee, in which a surviving spouse can take a greater amount of an estate under certain circumstances.

There are a number of problems here for McNair’s estate and his heirs.  First, instead of being able to distribute the assets in trust, they are distributed outright to everyone.  This causes all sorts of creditor protection and tax problems.  If McNair’s children are minors, then there will likely be a Guardianship set up to manage the assets until the minor reaches the age of majority, upon which he receives the funds outright.  Those assets should have been left in trust and protected from creditors and from the child them self until a later age.  His wife’s assets should also have been left in a trust too, to protect her.

Additionally, by dying intestate he missed the opportunity to engage in sophisticated tax planning.  Below I will show the disastrous estate tax consequences and the incredible opportunity that he missed. Assume the following:

1. The value of McNair’s gross estate is $25,000,000.
2. His wife takes an “elective share” of 40% of the estate
3. The remaining 60% is divided among McNair’s children.
4. There was no estate planning done at all — no gifting, no insurance trusts (ILITS), nothing (this is a big assumption which I hope turns out to be not true).

From the in ital $25,000,000, the 40% being distributed to the surviving spouse ($10,000,000) is subtracted from the taxable estate because of the marital deduction.  That leaves $15,000,000 remaining.  Of that $15,000,000, there is a lifetime exemption in 2009 of $3,500,000, which is subtracted from the $15,000,000, leaving $11,500,000.  Upon that $11.5 million there is an estate tax of forty five percent, or $5,175,000.  After the $5,175,000 is paid to the government, there is $6,325,000 remaining to be divided among McNair’s four children, or $1,581,250 each.

With proper estate planning, McNair would have owed zero estate tax upon his death.  If he had done nothing else but leave everything to his wife outright, that would have resulted in zero estate tax because of the marital deduction.  A simple credit shelter trust would have resulted in zero estate tax and protected $3,500,000 (in today’s dollars and subject to grow) from the estate tax upon his wife’s subsequent death.  Granted, with someone that was worth $25,000,000 and had children from a prior relationship, the planning would be more extensive and would likely involve insurance trusts, certain family entities, and gifting that would have started a long time ago.  And this only scratches the surface.

The lesson to learn from all of this?  Too many people put off estate planning until sometime “later.”  They think that they can wait because they don’t think that they will die tomorrow.  Unfortunately, tragic, sudden deaths happen all of the time, and you owe it to your family to be prepared.  You are not immortal.  The time to engage in proper estate planning is now.

  

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Today I am going to use the Michael Jackson case (yet again) as an example to discuss the important issue of timing when determining the value of assets included in a Decedent's estate for estate tax purposes.  As I’ve written before, the estate tax generally is imposed upon the value of a decedent’s estate at the time of his death.  Technically, according to Section 2001 of the Internal Revenue Code (the Code), “a tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United Sates.”  The “taxable estate” is the “gross estate” with certain deductions and adjustments.  The key is determining the “value” of the gross estate. 

(Note to estate planning and tax professionals, I will be ignoring the alternate valuation date for now)

Under section 2031 of the Code, “the value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.”  But what does “at the time of his death” mean?  Section 2033 of the Code provides that the “value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”  Furthermore, the regulations provide, “the value of every item of property includible in a decedent’s gross estate. . .is the fair market value at the time of the decedent’s death.  The 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 to sell and both having reasonable knowledge of relevant facts.”

Does it mean at the instant of death? 

For most people and for most property, the question is moot.  The value of cash, stocks, bonds, real estate, is not going to change from the second before death to the second after death.  But for Michael Jackson, it will make a big difference.  The value of his image and his name, and his right of publicity are obviously worth a lot more after he died than beforehand.  (For more on this see the TaxProf, Michael Jackson’s Looming Estate Tax Disaster, quoting Professor Caron’s previous article on Estate Planning Implications of the Right of Publicity. 

So is valuation on this property done the second before death or the second after (or at) death? 

It seems logical that the value should be the second before death, because that what it would be worth if Michael Jackson sold the rights if he were alive.  The mere lapse of time, or the event of his death itself, shouldn’t cause an increase in the estate tax.  It wouldn’t be “fair.”  Note however, that there is some property in which, at least in part, uses a post death valuation.

For example, stocks that are traded on an exchange are valued at the mean of the highest and lowest quoted selling prices on the date of death.  In a volatile market, this could provide a substantially different value of the stock from the instant of death, especially if the decedent has a large interest in it.  If Bill Gates were to die, each 1/8 of a dollar in Microsoft’s value could result in millions of dollars of difference in the gross estate.

But the property being discussed here is not stocks or bonds.  It’s publicity rights, and the interest in the music.  As such, I believe that the correct value should be the instant before death, and not at the much higher value afterwards.

 

 

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There is a well written and informative article at Morningstar.com entitled Avoid These Estate Planning Pitfalls.  In an interview with estate planning attorney H. Susan Jones, Christine Benz, Morningstar’s Director of Personal Finance discussess certain common mistakes that many people make, espeicially in regards to Beneficiary designations.  These include

1. Unintentionally disinheriting grandchildren if the grandchild’s parent (i.e. the account owner’s child) dies before the account owner
2. Naming children by name, and closing the door on future children not yet born
3. Naming minor children directly and not putting the assets in trust
4. Naming individuals who are either spenthrifts or who receive government benefits directly, instead of putting the assets in trust.

For more see, Avoid These Estate Planning Pitfalls.

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One of the blogs on my daily reading list is the “Tax Girl” (a/k/a Kelly Phillips Erb, a Philadelphia tax attorney).  She has a regularly occurring feature on her blog called “Ask the Tax Girl” which she uses to answer readers’ tax questions (and sometimes, when necessary, gives her readers the motherly advice that they deserve ).  She recently tweeted that she had received a tax question about Michael Jackson, and I replied that I’ve been blogging about the estate tax issues involved in the case and that I would be happy to answer her reader’s question.

Sigh.  Me and my big mouth. 

Note to self: Never underestimate the sophistication and intelligence of Taxgirl’s readers.  While I was expecting a rather basic, easy to answer, yes or no question, what I got instead was:

• Are Michael Jackson’s funeral costs ordinary and necessary and are they deductible on his estate tax return?

Not necessarily the easy yes or no answer that I had hoped for, but hey, if it were an easy question, the reader wouldn’t have had to ask it.  First some background information.

• As I previously blogged, the estate tax is imposed upon the “taxable estates” of citizens or residents of the US.  Each estate is entitled to a lifetime exemption of $3,500,000, which generally means that the first $3,500,000 of assets are not subject to the tax.  I am not going to explain it again in this post, but please read my previous posts here, here, and here for more detail.
• The term “taxable estate” is defined in Internal Revenue Code Section 2051 as the “gross estate” (which is the net value of the property in the estate) minus “the deductions allowed.”  Just as an individual is entitled to deductions on their income tax return, for example, the charitable deduction and the mortgage interest deduction, an estate is also entitled to deductions that reduce the gross estate, and thus the amount of estate tax owed.
• Section 2053(a)(1) of the Code provides, in part, that one of the deductions allow is that for “funeral expenses.”

For “ordinary run-of-the-mill” estates, the estate deducts the costs of the funeral from the gross estate on the estate tax return.  But in death, as in life, there is nothing “ordinary run-of-the-mill” about Michael Jackson.  What the reader is asking is whether Michael Jackson’s estate can deduct the millions of dollars associated with not just the funeral, but with the memorial service that was held yesterday. 

Section 20.2053–2 of the Treasury Regulations provides that for an estate to take a deduction for funeral expenses, the amounts paid must actually be expended out of property subject to claims.  In other words, in order to take the deduction, the estate itself has to pay the costs. Also, those costs must be out of property that are “subject to claims,” that is property that can be used to pay creditors under local law.  So first of all, any of the costs involved that were not paid by the estate but instead was paid by the taxpayers of the state of California or the city of Las Angeles are obviously not deductible.

The regulation continues, “A reasonable expenditure for a tombstone, monument, or mausoleum, or for a burial lot, either for the decedent or his family, including a reasonable expenditure for its future care, may be deducted under this heading, provided such an expenditure is allowable by the local law. Included in funeral expenses is the cost of transportation of the person bringing the body to the place of burial.”

While there is a requirement for the costs to be “reasonable” that determination is made on a case by case basis.  Reasonable for you and me is not necessarily reasonable for someone with a few hundred million dollars.  So will the costs be deductible?  Like many other tax questions, and many other questions about Michael Jackson, the answer is going to be — it depends. 

Here is my take:

1. Everything involved with the funeral (not the public memorial but the private funeral) itself, no matter how extravagant or expensive will be allowed as a deduction.
2. Everything involved with purchasing and maintaining the burial site itself should also be deductible, even if they build a monument to him.  In a 1927 case a $21,000 mausoleum was deemed reasonable.  That’s over $250,000 in today’s dollars.
3. The costs of transporting Michael Jackson’s body from the hospital, to the funeral home, to the memorial, to wherever his final resting place may be will probably also be deductible.  This includes any costs that the estate reimburses any local jurisdiction for police escort, shutting down city streets, extra security, etc.  Even though the public memorial location is not technically included, I think it would be allowed. 
4. Any other costs paid for by the estate for the public memorial which was not part of the funeral should not be allowed as a deduction.  The public memorial, while touching, was not really part of the funeral, and the IRS would have a strong argument if they chose to disallow the deduction.  However, that being said, I wouldn’t be surprised if the estate took the deduction, and the IRS allowed it.  The larger estate tax battle is going to be over the valuation of Michael Jackson’s intangible intellectual property and the actual size of his liabilities.

Phew.  Thanks for letting me assist, Taxgirl.  I think.

 

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I was interviewed last week by Kiplinger Magazine regarding some of the legal issues involving the Michael Jackson estate.  The article has been published and is here. 

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Beth Shapiro Kaufman of Caplin & Drysdale recently published an article in Estate Planning Magazinerecently published an article in Estate Planning Magazine entitled “United States: Estate Tax Legislation In 2009: Avoiding The Train Wreck.”  In it, she discusses the fact that the estate tax is scheduled to disappear next year and come back with a vengance ($1 million exemption, 55% rate) in 2011, which would certainly be a train wreck.  Kaufman lays out the various proposals on the table, but at this point, I’m not sure if her crystal ball is better than anyone else’s.

I just wish Congress would decide something.  The whole point of estate planning is to use the rules to come up with the best results. 

Planning can be very difficult if you don’t know what the rules are.

 

 

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As I have previously written, the estate tax is imposed upon taxable estates of more than $3,500,000.  Any amount over $3,500,000 is currently taxed at the rate of 45%.  As an estate planning attorney, my clients generally fall into one of three categories:

1. People whose assets are far below the lifetime exemption
2. People whose assets are somewhere between slightly below and slightly above the lifetime exemption
3. People whose assets are considerably above the lifetime exemption.

For clients in the first category, which these days is the vast majority of my clients, there is very little “tax” planning.  Estate planning consists of lifetime incapacity planning, and determining the best way to transfer assets to heirs while protecting those assets from potential creditors and maintaining some level of control, if so desired.  For clients in the second category, most of the tax planning involves structuring the client's assets so that the estate tax does not apply to them.  One strategy would involve a husband and wife dividing their assets between them, so that neither one owns assets above the lifetime exemption.

However, there are certain clients whose wealth is so far above the lifetime exemption, that no amount of planning is going to make the estate tax not apply.  For them, their estate is going to owe a tax on 45% of their taxable estate.  The question then becomes, what is the fair market value of the property in the estate?  For money, stocks, and bonds the answer is easy.  For other intangible property, the question is a lot more difficult.  There are techniques that estate planning attorneys use both when a client is alive and after the client has died to set the value of specific assets.  I will discuss some of these methods in future posts, probably in regards to the Michael Jackson estate.

Know for now that with regards to the estate tax, “The fair market value is the price at which the property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” 

 

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In my last couple of posts I explained that if Michael Jackson left assets to his mother Katherine in trust, a trust with certain specific rules, then upon Katherine’s death, those assets would not be subject to the estate tax a second time.  If Jackson engaged in proper estate planning, then he could accomplish his goal of taking care of his mother for the rest of her life, without losing millions of dollars to the government upon her death.

This is something that could, and should, be done by almost everyone, and not just the super wealthy.  Most people do not have to worry about the estate tax because their assets are far below the minimum threshold of the lifetime exemption.  Even so, there are a number of important non-tax reasons why people should leave their assets in trust — these involve protection and control.

I know I am starting to sound like a broken record, but everything I write here is pure speculation.  The Michael Jackson Family Trust has not been released.  However, if a client told me that they wanted to take care of their mother if they should die first this would be one of the methods that I would suggest.

CONTROL.  As I’ve written previously, I am sure that Jackson wanted to be able to support and provide for his elderly mother in the event that he died before she did, and left a sizeable amount of his assets for that purpose.  However, what he did not want was to give his mother the ability to determine what happens to those assets after she died. If Michael left the 40% (or any percent) of his estate to his mother outright, then upon her death, there would be nothing preventing her from leaving those assets to LaToya, Reebee, Tito, or her husband Joe, who Michael has accused on more than one occasion of beating him.  But by leaving the assets to her in trust, then Michael Jackson retains control from the grave over the disposition of the assets.  This is how it might work:

The assets are held for Katherine Jackson’s benefit in a trust. An independent trustee, probably John Branca, John McClain, or Barry Siegel, controls the distribution of assets to Katherine Jackson.  They will most likely be very liberal with this decision, giving her anything she needs to continue a lavish lifestyle.  However, there is no reason to give her more than her expenses.  In fact, they might just pay her bills directly.  When she dies, the remaining trust principal will be distributed pursuant to the Trust’s terms.  Most likely, it will go to Michael’s children, or to be more accurate, will be added to the trusts established for them.

ASSET PROTECTION.  The second non-tax reason why the property should be transferred in Trust and not outright is for asset protection purposes.  I want to be careful and point out that I am a Florida attorney and not a California attorney.  The laws regarding asset protection are generally state law based (with some federal bankruptcy law mixed in too).  But the basic premise is that if the assets are owned by the Trust, and if someone sues Katherine Jackson personally, then the person suing her can not collect against the trust’s assets.  There is no minimum or maximum that can be placed in trust.

A well planned estate is not just about avoiding taxes, and is not just for multimillionaires.  Through proper estate planning anyone can have the peace of mind that after their death their assets will go to benefit the people they want, and be protected from their beneficiaries’ creditors.

 

 

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In my previous post, I wrote that contrary to media reports, that it was highly likely, if not impossible that the Michael Jackson Family Trust (which has not yet been released) distributed his assets to his mother and his children outright.  (Various sites are reporting that the mother “gets” 40%, the three children receive 40% between them and that various charities will receive 20%).  I showed that his estate has to pay an estate tax of 45%, and if a distribution was made outright to his 79 year old mother of 40% of his assets (which could possibly be over $100 million) then when she dies, there would be another tax of 45% on the value of her estate.

Again, as the Trust has not yet been released, everything I write is pure speculation.

Most people don’t expect to die before their parents, and I can assume that when drafting his Will and Trust, Michael Jackson felt the same way.  However, he loved his mother and wanted to take care of her for the rest of her life should he pre-decease her. But giving her the money outright would be a tax disaster (and a bad idea for other reasons that I will discuss in later posts).  The solution?  Leave the property to her in a trust with certain rules.

Without going into too many technical details, when a person dies their estate is subject to tax on property they own, and ownership is largely determined by control.  If Katherine Jackson is distributed the property directly, she certainly controls it.  Also, if it is distributed to her in a trust in which she is the sole trustee and has unfettered access to the principal, she is in control.

However, if the property is distributed to a trust in which an Independent Trustee is responsible for determining when, and for what purposes, the trust assets are distributed to her, then upon her death, the property in the Trust will not be subject to the estate tax a second time.  In fact, Katherine Jackson can even be the Trustee herself and make distribution decisions, if the reasons for the distributions are limited to what are known as certain “ascertainable standards.” This means that a trust could be created in which she has the power to withdraw property for her health, education, support, and maintenance.  Upon her death, the property in the trust would not be subject to the estate tax, however, anything that she withdrew from the trust and still owned would be.

By engaging in proper estate planning, Michael Jackson could take care of his mother so that she lives not just comfortably, but in absolute luxury for the rest of her life, and then upon her death, those assets would not be subject to the estate tax a second time.

In a future post I’ll discuss the non-tax reasons why this type of planning is a good idea for everyone, even if you do not have millions of dollars.  This involves protecting the assets from your heir’s potential creditors, and controlling the ultimate disposition of them. 

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In my previous post, I speculated that the published reports stating that Michael Jackson left 40% of his estate to his mother Katherine Jackson, 40% to his children and 20% to charities was not, could not be entirely accurate.  Although I have not seen it the Michael Jackson Family Trust document, I am sure of the fact that instead of having the trustee distribute his assets to his mother and his children outright, that instead, the property was kept in trust.  The three reasons I set forth were (1) the estate tax, (2) creditor protection, and (3) control.

In this post, I will discuss why anyone who has significant assets should leave their property to their relatives in trust, and the potential tax disaster that awaits them if they do not.

For the sake of simplicity, assume that Michael Jackson had a taxable estate, of two hundred million dollars ($200,000,000) and that he left half to his mother outright and half to be divided among his three children outright.  I removed the charity to make the math more simple.  Also, while there are issues legal involved when significant assets are left outright to minor children, this post is only about the estate tax aspects, so ignore that for now.

Taxable Estate	$200,000,000
Tax Rate	45%
Tax Owed	$90,000,000
Amount Available for Distribution to heirs	$110,000,000

Michael Jackson Estate Tax — Al numbers are hypothetical and are used for example purposes only.

Notice that the estate is confiscatory.  If Michael Jackson’s taxable estate is $200,000,000, then the federal government will receive ninety million dollars in taxes!  The distribution to his mother and children are as follows:

Remember however, that Katherine Jackson is 79 years old.  When she dies, all of those assets will be subject to the estate tax again!  Anything she left to her husband Joe Jackson would not be subject to the estate tax because of the marital deduction.  But then when he died it there would be an estate tax.  If her taxable estate is $55,000,000, then that’s another $24,750,000 to the IRS.  However, if instead of leaving the assets to his mother directly, he left them in trust for her, a trust with specific rules, then upon her death the assets will not be subject to the estate tax.

I will explain how this is done, and what the rules are in my next post. 

 

 

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It’s not my intention to turn this blog in to a celebrity gossip site.  However, there are a number of legal issues regarding Michael Jackson’s estate that are continuously being reported on by reporters who do not fully understand (or do not care about) the nuances involved.  The latest batch of confusion involves the disposition of Jackson’s assets in the Michael Jackson Family Trust.

As I previously posted, on July 1, Jackson’s Will was filed with the Cour  along with a Petition for Probate.  His will is what is known as a “Pourover Will” because it pours over any assets that Jackson owned in his individual name and not in the name of the Michael Jackson Family Trust, into the Trust.  The Petition for Probate listed Jackson’s mother Katherine and his three minor children as primary beneficiaries, along with a number of other Jacksons (who I assume are his nieces and nephews) as secondary or contingent beneficiaries.

There is no legal requirement for a Trust to be released to the public.  In fact, one of the reasons to do a Trust, especially if you are very wealthy or a celebrity is to keep your affairs private after your death.  That being said, like everything else involved in this case, I expect a full version of the Trust to be leaked any day now.  Already the press is reporting on, as TMZ so bluntly put it, “Who Gets What”.  According to the reports, “Katherine Jackson will get 40% of the assets.  Michael's 3 kids will get another 40%. And the remaining 20% goes to several children's charities.”

This cannot be completely accurate.  While I have not yet seen the document, I am 100% positive that each of Jackson’s mother, and his children are to receive their shares in trust, with a the trustee having the power to make or not make distributions of income or principal according to certain standards.

There are a number of reasons for this, from a tax perspective, from a creditor and asset protection perspective, and from a “Control” (yes, that’s Janet, not Michael) perspective. 

Later today I’ll explain why.  (I’d do it now but I have to go to a client meeting.  Blogging is fun but doesn’t pay my mortgage).

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I have previously written in the blog about the Estate Tax, but I’d like to revisit the subject using the real life example of the Michael Jackson estate.  First, some review of the basics.

The estate tax, which is often, but inaccurately called the “death tax” by people who oppose it, is not an income tax.  It is an excise tax on the value of assets transferred by an individual at the time of their death.  This includes not just money in the bank, but all assets owned by the individual, i.e. cash, stocks, bonds, real estate, Beatles songs, and Elephant Man bones.

A person dying in 2009 has a lifetime exemption, that is the amount of assets they can transfer at death before the estate tax applies, of three million five hundred thousand dollars ($3,500,000).  After that, the rate of tax on that person’s assets is 45%.  Interwoven with the estate tax is the gift tax which is a tax based on inter vivos (which means lifetime) transfers.  However, for the sake of simplicity, I will assume that Michael Jackson did not make any taxable gifts, that is, he did not make any gifts that would affect the estate tax.

Much of the public debate over the estate tax involves the lifetime exemption.  The higher the exemption is, the fewer people there are that would be subject to the estate tax.  A decade ago, the lifetime exemption was only $600,000, so a great many people were subject to the estate tax.  As it is now, very few Americans have estates that are worth $3,500,000 (especially with the stock market and real estate crash).  A married couple that engages in proper estate planning can leave $7,000,000 to their children (or to anyone they want) tax free. 

But for the Michael Jackson’s of the world, the amount of the exemption is irrelevant.  When you have hundreds of millions of dollars in assets, it does not matter whether the lifetime exemption is $1,000,000 or $3,500,000 or even $10,000,000.  What really matters is the rate, that is what percentage of the assets will be subject to the tax.  As I wrote earlier, Michael Jackson’s estate is looking at a possible estate tax liability of 45% on his taxable estate.  And the IRS doesn’t take payments of Red Zippered suits.  Cash only please.

There are a few things that should lessen the amount of the estate tax that he owes however.  First, the tax is only imposed on the net value of his assets.  The estate can deduct from the value of the assets any liabilities that the decedent had at the time of his death.  And according to published reports, Michael Jackson had very significant liabilities.  In fact, his liabilities may be so large that his estate could be worth far less than anyone would expect.  Second, just like there is an income tax charitable deduction, there is also an estate tax charitable deduction.  Any money that Michael Jackson left to charity will be deducted from the value of his taxable estate, and thus reduce the amount of estate tax that he owes.  Third, the estate may deduct the costs involved in administering the estate, which I also suspect will be substantial.

Although news reports say that it will take years and years to sort all of this out, the estate tax is due and payable nine months after death before interest and penalties (which are substantial) start kicking in.  So whoever is in charge of the Form 706 Estate Tax Return has their work cut out for them.

In a future post I will talk about the essential question of valuation, that is how do you determine what an asset is worth.  Cash and stocks and bonds are easy to value and even real estate has comps.  But how do you value the future income stream of the Beatles catalog?  What is the likeness and image of Michael Jackson himself worth?

Tough questions.  Stay tuned.

 

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The “Petition for Probate” in the Michael Jackson estate, which in Florida would be called “Petition for Administration” was filed in California today, along with his will. This is a petition filed with the court, requesting that the probate of his estate be opened.  In Florida, this is generally a standard form document (although it can and should be changed under the right circumstances).  I obtained the above Petition from The Smoking Gun

I am a Florida trusts and estates attorney and not a California one.  While many of the basic concepts are the same, there can also be vast differences.  I am not sure if what I linked to above is the entire filing or not.  It appears to be incomplete.

It lists John Branca, John McClain and Barry Siegel as both Co-Executors of Michael Jackson’s estate and successor co-Trustees of the Michael Jackson Family Trust.  So that answers one question as to the identity of the Trustees.  As co-executors of the estate and co-trustees of the trust, they will be able to more easily manage the transfer of the assets not already in the trust to the trust. Not to mention that there are fees that they can be paid for serving as both co-executor and co-trustees.  While these fees are not normally that large, in an estate of this magnitude and complexity they could certainly go into the millions of dollars.

According to the submission, the primary beneficiaries (that is the people who are first in line to receive the assets from the trust) are Michael Jackson’s mother Katherine Jackson, and his children, Prince Michael Jackson Jr., Paris Michael Katherine Jackson, and Prince Michael Joseph Jackson II.  The Petition for probate only states that they are beneficiaries.  They do not state any of the terms.

A big deal has been made in the media that Michael Jackson put his mother in as a beneficiary but omitted his father.  This is silly.  Katherine and Joseph Jackson have been married for over 60  years.  Joe Jackson does not technically have a right to his wife’s inheritance.  However, in reality, they are a long time married couple who presumably share everything.  Giving to his mother is not really leaving his father out in the cold.

There are also a number of contingent beneficiaries named.  These are people who inherit of the primary beneficiaries for some reason are unable to.  Or, the primary beneficiaries may have been provided with their share in a trust.  For example, there may be a trust that provides Katherine Jackson with all of the income from the trust, plus principal for her health support and maintenance for the rest of her life.  When she dies, the contingent remainder beneficiaries may inherit what is left (probably also in trust)

Again, this is all speculation, but would be something that I would do.

The contingent remainder beneficiaries are (all people have the last name Jackson unless otherwise indicated): Levon, Elijah, Anthony, Taj, Tarylls, T.J. 

While there are probably more, that is all that The Smoking Gun published at this time.  When I obtain the remainder of the document, I will post an update.

 

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Here is the link to Michael Jackson’s Last Will and Testament.

The will is what’s known as a “pourover” will.  In other words, instead of the will itself disposing of all of his assets directly, it instead transfers all of his assets to the “MICHAEL JACKSON FAMILY TRUST” as amended and restated on March 22, 2002.  The terms of his revocable trust will govern the disposition of his property.  I assume that most of the assets will remain in trust for his children and their children, with significant distributions to other family members and charities.

However, I don’t know.  I’m only assuming.

A will is public and is filed with the court.  A trust is not.  There is no obligation to disclose the terms of the trust to the public.  Certain beneficiaries are entitled to copies of the trust however, and it’s possible that one of them might leak it at some later point in time.

The executors of the will (which in Florida would be called personal representatives) are John Branca, John McClain, and Barry Siegel.  Their primary responsibility will be to transfer the estate’s assets, that is the assets that were not already owned by the trust, to the trust.  The successor trustee (whoever that might be) is then responsible for managing the trust estate.

He did nominate his mother, Katherine Jackson as the guardians of his minor children.  In the event of the death, inability, or refusal to act of Katherine Jackson, he nominates, believe it or not, Diana Ross!

Those are the only details now.  It’s a short five page will.  Unless there is a subsequent will, or the trust somehow becomes public, this is all the information that will be public.

I’m actually impressed.  It seems that as irresponsible of a person as he was, he might have actually done this correctly.  CF Anna Nicole Smith.

 

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I'll write more on this myself as it develops, but here are some articles to check out:

Smart Money: Michael Jackson's Death and Your Estate Plan

Reuters: Hello Goodbye: Jackson's Beatles rights at risk

Wall Street Journal: Getting Personal: Jackson Estate a Tangled Affair

Business Week: Settling Michael Jackson's Estate may be a Thriller.

 

At this point, all anyone is doing is speculating.  No one knows if he had a will or where it is.  At least no one who is talking.  There is a "rumor" going round the internet that "Michael Jackson willed his control of the Beatles songs to Paul McCartney."  That is almost certainly not true.

First, unless MJ specifically said this somewhere, how would anyone know it?

Second, the asset is highly leveraged with many secured creditors.

Finally, it's probably the most valuable thing that he owns.  Why would he do that to his children?

This is going to be fascinating from an estate planning and tax and administration perspective.  And I haven't even talked about what happens to his children yet.

Stay tuned.

 

 

 

 

 

 

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 Kudos to the Wall Street Journal for letting parents know the importance of setting up trusts for their children upon their death.  Generally, if you don't have a Will, or have one that leaves everything to your minor children outright, then upon that child reaching the age of 18 (or 21 depending on the state), the child will receive all of their money outright, without any supervision.  Also, before they reach the age of majority, a Guardianship (which can be expensive and burdensome) might be required.

One thing that I think the article does not make clear is that you do not have to set up a separate trust while you are alive.  A revocable trust is proper for some people, and others transfer money or property to an irrevocable trust for their children's benefit for estate planning or other purposes.  But for most people, the trust for your children is part of your will.  It does not come into effect until after you die (or upon the second death of you and your spouse).

For more, see Deciding if Your Kid is Trust-Worthy. 

 

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Although much of Estate Planning and family law is state law specific, I highly recommend that anyone who is interested in Estate Planning and Divorce to check out a recent radio interview done by Leanna Hamill, an estate planning attorney in Massachusetts.  Her blog is here, and the blog post linking to the radio episode is here. 

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Yesterday the New York Times published an article about how gay and lesbian couples are engaging in "adult adoption," in effect adopting each other, in order to secure inheritance rights to family trusts.

In "Adult Adoption a High Stakes Means to an Inheritance" writer Deborah L. Jacobs writes that while it is not necessary to use this strategy to transfer your own assets, which can be left to anyone you choose, it can be useful for certain trust beneficiaries.

For example, often when I draft a Trust, the Settlor will provide that upon his death, the property will go in Trust to his child, X, for life.  X is entitled to all of the income from the trust, plus principal for X's health, support, education, and maintenance.  Upon X's death, the trust monies will go to X's children, either in further trust, or outright.  Sometimes, depending on the wishes of the Settlor and what type of tax planning we are trying to accomplish, X will have a power to appoint the property upon X's death to someone else.  Sometimes the power will be limited to X's children or the Settlor's descendants, and sometimes the power will be more broad.

If cases in which the property will automatically go to X's children, or when X is limited in his power to appoint the property, an adult adoption may allow X to direct the property to X's partner.  Of course, as the article points out, this strategy is fraught with danger.

An adult adoption clearly is an attempt to frustrate the intention of the Settlor, who wished for the property to go to further generations.  If X has a sibling, Y, who is married, Y can not leave the property to Y's spouse, which is in effect what X is trying to do. 

As the article points out, "The lessons here? Family opposition to an adult adoption should never be underestimated. And family members should be informed about your intentions; don’t surprise them."

 

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There is an article today on CNN's site, taken from its Time-Warner Sister Money Magazine entitled "Rethinking your estate plan."  In it, the author interviews a couple whose assets have recently fallen 15% in value (which actually isn't bad compared to most people).  The couple, Les and Anna Glowacz executed estate planning documents five years ago, but due to the decrease in the value of their assets and the increase in the lifetime exemption to $3.5 million, they are unsure whether or not their plan still makes sense.

I am not going to reprint the entire article here.  However, I made some comments in the parentheticals below re: their questions.

1. Give gifts now or later (I think that now is probably the best time in history to give gifts as their values are low, interest rates are low, and there is uncertainty over what will happen with the estate tax)
2. Does your state have a state death tax?  (Florida currently does NOT).
3. Should you split your property among your children "equally" or "fairly?"  (Generally, "equal" is "fair" but not necessarily in all circumstances).
4. Simple or complicated? (This depends on the circumstances.  Simple situations, such as a couple in their first marriage with adult children and significantly less than $3.5 million might have two simple wills.  However, the more complicated the larger the estate and the more complicated the family dynamics, the more complicated the documents).
5. Do you want to give to charity? (With regards to charitable donations, there are a number of decisions to make, as to whether to give now or at your death, what assets to give, and whether to make a "split interest" gift, such as through a charitable remainder trust).

 

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Just a little light humor for a Sunday afternoon.

A guy walks into a bar. He recently found out that his elderly father will be passing away in a few years and leaving him a very large inheritance. Using this new information as leverage in the dating market, he decides it’s time to find someone to settle down with.

So guy looks around the room and locks eyes with this stunning young woman. He figures she’s probably out of his league, but walks up to her with his new boost of confidence and says, “I may not look like much now, but in a few years my father will pass away and I will have millions. Would you be interested in going to dinner sometime?” She’s interested, and gets his name and number. A week later, she became his step-mom.

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 George E. Meng, an estate planning attorney in Maryland for over 35 years, has written an article in The American Chronicle entitled "Realistic Estate Planning."  In it he discusses some of the following issues:

1. Will or Trust?  Mr. Meng points out that the primary reason for using a trust is probate avoidance, something I've written about before.  He explains that a trust needs to be funded and takes commitment to be run properly -- otherwise there will be more probate work after the settlor's death.
2. Should there be bond?  While most trusts and wills waive bond, the article explains that that is not always in a client's best interest, and estate planning attorneys should explain the pros and cons of requiring a bond or waving bond.
3. Using co-PRs or co-Trustees -- Mr. Meng does not think that it is a good idea as it may cause more issues than it solves.

 

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One of the bedrock rules for estate planning attorneys is that our clients must have sufficient mental capacity to execute their documents.  This does not mean that a client has to have perfect understanding of every passage of legal boilerplate.  Basically, a client needs to be able to understand the nature of their property and the "natural objects of their bounty" -- i.e. who their family members are.

I have had situations in which I have interviewed potential new clients (generally senior citizens who were brought to me by their children), and have refused to represent them because I did not believe that the potential client had capacity to execute documents.

What made me think about this is that I read an article about a case in California, in which an attorney was sued for malpractice by a decedent's new wife because the attorney refused to amend the Decedent's trust before the Decedent received a psychiatric evaluation.  According to an article in the Metropolitan News-Enterprise, the attorney did not owe duty to a potential beneficiary for a document not drafted.

Although it does not directly impact me because I am not in California, it is interesting nonetheless, as it is a constant reminder of the many interests that estate planning attorneys have to balance in working for our clients.

 

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I've written numerous posts about how the estate tax remains in flux.  Right now the exemption, that is the amount a person can own when they die before being subject to the federal estate tax is $3,500,000.  Next year (2010) that amount becomes unlimited, and the year after that it goes down to $1,000,000.  No one (or very few people) actually think that this will happen == at some point, Congress will change the law to "fix" things.

But as Teresa Norton and Kristen Ingersoll, two estate planning attorneys in California wrote in the North Bay Business Journal, even if the exemption is set at $3,500,000 permanently, that does not mean that less wealthy people should put off, or forgo their planning.  They write:

Assuming the estate tax is ultimately “fixed” by year end and the exclusion remains at least $3.5 million per person, many clients question whether they still need to undertake the sometimes arduous and often emotional task of estate planning. The answer is, of course, absolutely.  First and foremost, estate planning is critical to ensure that your estate is distributed to the heirs and beneficiaries that you desire. . .  Secondly, every solid estate plan should include powers of attorney to ensure that fiduciaries are nominated to handle financial affairs and make health care decisions for you in the event of incapacity. In addition, with the escalation of litigation in the area of decedent’s estates, attentive and deliberative planning is essential to minimize the risks of litigation among family members. Moreover, uncertainty often strikes when we least expect it. Thus, until the state of the estate tax is clarified in the coming months, and even more so thereafter, estate planning remains vital and essential.

 Definitely good advice.

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This past weekend was the annual conference of the American Bar Association Section on Taxation. At one of the sessions focused on the estate and gift tax, aides to Senate Finance Committee Member Charles Schumer (D-NY) and John Kyl (R-AZ) appeared jointly. According to Sen. Schumer's aide, there will much more likely be a "patch" then any long term reform this year.

My guess continues to be that they will just take the 2009 exemption and rates and extend it outwards -- without portability, without changing the rules regarding GRATs, and without changing valuation rules with family limited partnerships.

But we'll see.

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According to David Goldman, the other Florida Estate Planning blogger named David (but who lives 300 miles away in Jacksonville), Leona Helmsley's estate made distributions of $136 million to charities, and "only" $1 million to her pets.

 

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I apologize for not updating this, my continuing series (and my blog in general) in which I order estate planning documents from an Internet document service. As I previously wrote, I attended the ABA Techshow in Chicago, and got sick when I came back.  Between the late nights, and the Chicago cold, and the uncirculated airplane air, I've been fighting a pretty bad cold.  I'm really feeling better though, but not 100% yet.

To refresh your recollection, I am going through the process to see what a customer of this site is offered and what type of documents they produce.  As I've said, my philosophical issue with these services is that they allow customers to choose what they want, instead of having a professional discuss with them what they need

In my last installment, I decided that I needed a Living Trust (even though I would never recommend a Living Trust for someone in my circumstances).

The first question:  What type of Living Trust would I like to make?

 

I don't know the answer, so I click on the Help button.

 

 

As you can see, the Help page is filled with error and ambiguities.  I certainly hope that anyone who actually needs an "AB" trust (generally couples that have more than a couple million dollars) would see an estate planning attorney to begin with.

I decide I want an Individual Living Trust, and move forward.

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As you have probably read, first Iowa, and then Vermont have voted to legalize same sex marriage.  Also, the District of Columbia has voted to recognize same sex marriages performed in other states.

However, as I have previously written, there is still no relief for same sex couples for federal tax purposes.

 

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I recently discovered a new (to me) blog entitled the Pet Trust Law Blog, written by attorney Danny E. Meek. As you can tell from the title, Danny's blog is dedicated to the issues of estate planning for people with pets  -- especially those who want to ensure that their pets are taken care of after their death.

He recently wrote an entry on "in terrorem" clauses in wills:

I spoke with a dog owner yesterday about some estate planning for her Boxer named Molly.

Molly’s owner, Mandy, told me that her only relative is a brother that she has not spoken with for years, and she is sure that no matter how she provides for Molly in her will, that the brother will contest the matter in the courts and try to take the money set aside for Molly.

We discussed the option of establishing a trust for Molly, but Mandy was not interested in that avenue.

I then suggested that the will could include an "in terrorem" clause.

“My brother may be a bad person, but he is certainly no terrorist,” exclaimed Mandy.

I smiled and explained that an "in terrorem” clause provides that if a person unsuccessfully challenges a provision in a will, then the challenger cannot receive any property under any other provision of the will.

So, if a court finds that Mandy’s will is otherwise valid, the clause providing monies for the care of Molly will be upheld, despite the protests of her brother.

Mandy’s desire to take care of her dog will be fulfilled.
 

In Terrorem clauses can be used by a testator wishing to prevent a will contest after their death.  As Danny wrote, the clause serves as a disincentive for heirs to challenge the amount that they would otherwise receive.  However, these clauses are invalid in the state of Florida. Section 732.517 of the Florida Statutes provides that a provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable.

So if you are a Florida resident, there are still methods to dissuade your potential heirs from challenging your will, and, if you believe such methods are necessary you should speak about those with your estate planning attorney.  However an in terrorem clause is not one of them.

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I am still in Chicago for the ABA Techshow, which bills itself as "The World's Premier Legal Technology Conference and Expo.  Aside from meeting a number of great people from all over the country, I also learned quite a bit.  As a solo practitioner, my goal is to spend as much of my time as possible serving my clients, and as little time as possible dealing with the "administrative" side of running my practice.  I picked up quite a few tips here to help make that so.

Regular blogging on estate planning and related issues will resume next week.

PS.  I received my Internet ordered trust in the mail right before I left.

 

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The Motley Fool just published a brief article entitled 3 Estate Must Dos.  They are:'

• Find an attorney who is thoroughly versed in estate planning. Your divorce lawyer or patent guy probably won't hack it. 
• Stay up to date on tax changes. They affect your planning documents.
• Make sure that the right people know where to find these documents. Remember, it's a question of when (not if) they'll be needed.

 

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I've never been a big fan of About.com. Everything about it screams "Web 1.0" to me in the way it is organized, marketed, and advertised. That being said, in the internet, "Content is King" no matter who is behind it.

I recently stumbled upon the About.com:Wills & Estate Planning area which is run by Key West Attorney Julie Garber, who geographically speaking at least is more of a South Florida Estate Planning attorney than I am. (Although truth be told, it's more like North Cuba). I think she does a great job of running the site, which is chock full of straightforward well written articles by her.

I wish that at the bottom of the front page there wasn't a Sponsored Link for "Easy Online Will $19.95," but that's about.com's doing and not hers. Check out Julie's Post on "Are Gifts to Your Spouse Taxable" for the type of posts that are over there.

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In writing a blog, or in writing anything, the most important question is "Who is your audience?"  So far, my posts have been aimed towards what I call "the sophisticated layman."  I have been writing for the educated reader who is not an expert in matters regarding estate planning or tax, and is interested in learning more. 

But every now and then there is "breaking news" in the estate tax world, that most laymen, sophisticated or not, probably would not be interested in, but would be of interest to estate planning and tax experts. This is one of those times. 

Yesterday, the US Tax Court's issued its opinion in Estate of Jorgensen v. Commissioner, ruling that the entirety of assets transferred to a family limited partnership were included in the gross estate of a decedent under s. 2036(a)(1) of the Internal Revenue Code.

Like many other cases in which there is a complete victory for the Government, the most important lessons in this case for Estate Planning attorneys is "Don't do this." 

More after the jump

Continue Reading...

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As I posted in my last post, I decided to go to an internet website that purports to provide wills and trusts (among other things), to see how good their service really is, and whether they are properly helping their customers. I will not say their name right now, except to say while their zip code is not 0-2-1-3-4, if you grew up watching TV in the 70s, it might have been.

The first thing I notice about their webpage is how "busy" it is. There are a lot of different options all over the place, and it's a bit confusing. The next thing that I notice is that the company advertises itself as as "Legal Document Service." Oy. As an Estate Planning Attorney, my job is not to provide "documents" to my clients. My job to provide them with advice. There is a reason that attorneys are often referred to as Counselors. Before I sit down with a client for the first time, They don't, or shouldn't, already know what they need. For every new client that I have, before drafting any documents, I sit down with the client and interview them. I ask them extensive and sometimes intrusive questions about their family and finances. I would be committing legal malpractice if I didn't. It isn't until the end of the interview that I discuss with the client what legal documents, that in my opinion that the client needs. This company, as a "Legal Document Service" provides its customers with legal documents that the customers choose for themselves.

I see the link for "Wills & Living Trusts," click and jump in.

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I keep hearing from people what a great "deal" a certain internet website is. You just log on, type your information, and you can instantly get wills, trusts, corporations, trademarks, etc, just as good as one prepared by an Estate Planning or other Attorney for a lot less money. As I posted before, I believe that this is impossible. No computerized website can ever give you the personal and customized attention that an Estate Planning Attorney can. It does not know how to ask the right questions and come up with the right solutions based upon your individual circumstances.

"But", someone will say, "You've never ever seen a document from them. For all you know, they're perfect."

Fair enough.

So I decided to see for myself. I went to this site, signed up, and ordered a revocable living trust. I even paid for it. I answered the questions, went through the whole process and filled out the information as if I were a client (of course, I didn't use any real attorney client information). Over the coming days, I will write about my experience in using the site, signing up, answering the questions, and the documents that I receive.

When the document arrives in the mail, I will read it and post my thoughts about it. I'm going in with a skeptical mind and am biased, but I'm prepared to be swayed. I actually hope I'm wrong because it bothers me greatly that there are so many people out there who have "peace of mind" in the belief that they've done their estate planning, and have what may be faulty documents.

In my coming reviews, whenever I profoundly disapprove of something that the site is doing, I will indicate it to you by invoking something my Grandmother always says:

Oy.

Be prepared, there are a lot of Oys coming, regarding just using the site, and I don't even have the documents yet.

[Note: While I'm sure you can figure out who it is, I purposely didn't mention the site at this time. I don't want to influence the experiment.]

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I would like to welcome the Molder Legal Group to the South Florida Estate Planning blogging community.  Their Florida Parents Page blog recently launched.  It looks like their blog will be more tightly focused on planning for parents with young children.  Good luck, Jason and Nicole.

 

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Like many people today, I love the Internet. It is a great business, social, and financial tool. I am member of a number of various discussion forums (legal, technological, social, and personal), have a Facebook Account, a twitter account, multiple email addresses for business and personal use, and  now have friends all over the world, many of whom I've never met

Additionally, in managing my personal finances, I try to live a paperless life as much as possible. I probably physically write less than 10 cheques a year, and sign up for paperless billing for every account that offers it. I wish that I could produce digital Wills and Trusts for my clients, but the law hasn't caught up with the technology yet, but that's a topic for another time.

I'm sure that many of you reading this are nodding your head in agreement because you are just like me. But have you ever thought about what will happen to your online life after you die?  The process of administering your estate or your trust upon your death involves gathering your assets, paying your creditors, and then distributing the assets to the beneficiaries. Generally when someone dies we file a form with the US Post Office so that the decedent's mail is forwarded to their personal representative, trustee, or to the attorney administering their estate. Most banks, credit card companies, brokerages, etc, send a monthly (or at the very worst quarterly) statement. Thus, it's not that hard to figure out what the decedent owned (and owed).

More after the Jump

UPDATE: Jeremy Toeman of Legacy Locker responded to this post and his comment and my response are in the comment section below.

Continue Reading...

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The New York Times published a good article yesterday laying out what I've been telling everyone lately -- that it's time for everyone to reevaluate their estate plan. In Smaller Though It May Be, It's Time to Look at the Estate NYT writer Paul Sullivan states:

But estate planning is not primarily about avoiding a tax that few have been subject to since it was instituted in 1916. The primary goal has always been how to bequeath what you have to the heirs you picked. And if handled wrongly, wills can become a vehicle that destroys families.

 The most important points that I hope people take from this article are that:

1. The Estate Tax is here to stay.  Virtually every Estate Planning attorney will tell you that repeal, fought so hard for by Republicans is dead.
2. The "exemption," that is the amount a person can die owning before being subject to the estate tax is currently $3.5 million, and probably will be at least that amount in the future.
3. Over the past two years, many people who are (or were) subject to the Estate Tax lost a substantial amount of their wealth.  Not only that, their successful adult children, who didn't necessarily need an inheritance from their parents have also lost a substantial amount of wealth.  I've heard anecdotal evidence that sales and rentals of this movie have skyrocketed (just kidding).

 Those three above factors result in many estate plans being very problematic.  They may have been perfect when drafted.  The problem is the attorney who drafted it did not anticipate the fundamental change in the economy.  No one did.

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This post concerns what I see are the dangers of people buying fill in the blank Wills in stores, over the internet, or using consumer software.  And I am going to admit right up front that I have a personal and financial bias.  My job is to provide estate planning services, which may include wills, trusts, advanced directives and other documents, to clients.  Like anyone else who works for a living, I certainly prefer that people hire me and not someone else.  If instead of going to me, people buy software that purports to prepare Wills, or they buy a Will from a company that constantly advertises on the radio, then I am not benefiting financially.

But this post isn't about that at all.  If a client chooses to hire an attorney other than me then I'm not making money either, yet that does not bother me.  What bothers estate planning attorneys about store bought fill in the blanks wills and trusts, or software, or internet Wills, is that they often end in disaster.  Virtually every estate planning attorney has more than one story about a bereaved family finding out after their loved one's death that the do it yourself Will did not accomplish what it was supposed to, or wasn't properly executed and therefore was invalid.

My main concerns with do it yourself estate planning are as follows:

1. People are choosing what they need without professional advice.  Someone will get into their mind that they "need a trust" and will go onto the internet and order one.  It would be like if I woke up one morning with a stomachache and without going to the doctor decided that I needed an appendectomy.  A person needs to sit with an expert to decide whether they need a trust, and what kind, and what it should say.  And even if the person does need a trust, it still has to be properly funded, something a form can't do.
2. The "one size fits all" problem.  A fill in the blank form bought in a store or ordered over the internet is not going to be custom tailored to an individual client's needs.  Every person has their own special set of circumstances, whether it is the type of assets they own, or special provisions that might be necessary for their children.  Just one example, if you are in Florida and you own a home, the rules regarding how you may devise your Homestead are extremely complex. No preset form, or company in another state can possibly get it right, because there are too many variables, and every situation is different.
3. The Law is constantly changing.  How often are these forms updated to reflect changes in the law?  Can you have confidence that the document is valid for your state?
4. People who buy premade Wills often do not execute them properly causing the Will to be invalid.  The law regarding the execution of Wills is very strict and unforgiving.  In Florida, a testator must execute his Will in the presence of two witnesses who also must sign in the presence of each other.  There are numerous cases of Wills being declared invalid because the signing requirements were not adhered to.  If a Will is invalid then the estate passes through intestacy. An estate planning attorney is likely to have presided over the execution of hundreds, if not thousands, of Wills and will have a procedure to ensure that each and every Will is properly executed.

I understand why people buy store bought Wills or software instead of going to an attorney.  Money and time.  They see an attorney as far too expensive, and probably don't really understand what an estate planning attorney truly does.  They think the $39.95 form or $49.95 software will be "good enough." 

If time and money are the motivating factors, then you should know that it is much more expensive and it takes a lot longer to fix the mistakes after you are dead than it would have been to do it right the first time.  A Probate, especially one complicated by a Will with errors or that is invalid, will most likely cost at least 3 times as much as proper planning would have.

I'm not saying that the software, forms, or internet wills will always be invalid.  I'm just saying think of your family, and be careful.  Like anything else, there is no substitute for personalized one on one advice.

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Over the past few years, one of the most active and contentious political issues in this country has been that of gay, or same sex marriage.  Proponents of same sex marriage have argued that a married couple automatically has "1400" rights just by virtue of being married.  They argue that since same sex couples are unable to get married, that there is no method for them to obtain these same rights with regard to their partners.

As this is a legal blog and not a political blog, I do not want to discuss the political issue of gay marriage here.  Professionally though, as an estate planning attorney located in Broward County, it is my job to best serve my clients.  There is a large gay community living in South Florida -- whether it is Miami Beach, Fort Lauderdale, Wilton Manors, or just in the community at large.  It is important for same sex couples to know that through proper estate planning, they can obtain many (but not all) of the abilities (not necessarily "rights") that a married couple has with regards to inheritance, hospital visitation, and the power to make medical decisions for their partners. 

What's even more important for same sex couples to know is that if they have not engaged in proper estate planning, because they are not considered related to their partner, they will have virtually none of the rights that a legally married couple has with regards to these issues.

Before moving on, I do want to state that for Federal estate and gift tax purposes, there is no equality.  There is nothing that can be done to match the incredible power of the marital deduction  in which an individual may give an unlimited amount of property to their spouse tax free, either during life or at death.  However, a good estate planning attorney should be able to suggest some alternative tax reduction strategies for same sex couples including using up your lifetime gift exemption, paying for your partner's education and medical bills directly, or a GRAT.  But unless a person has at least $3.5 million, the estate tax is not necessarily something that they should be worrying about right now.

But what does concern same sex couples is the same thing that concerns all couples -- the right to visit their partner in the hospital when sick, to make decisions for their partner when their partner is unable to due to incapacity, and to inherit property from their partner upon their partner's death.

PROPERLY DRAFTED ADVANCED DIRECTIVES, INCLUDING A DURABLE POWER OF ATTORNEY AND HEALTH CARE SURROGATE ARE ESSENTIAL

As I've blogged about previously, Estate Planning is about Planning for disability as well as death.  With a properly drafted and executed durable power of attorney and designation of health care surrogate, an adult can choose any person they want to make financial and/or medical and health care decisions for them, in the case the person is unable to make them for themselves.  If a person does not have these documents in place, then a hospital will look to that person's "spouse" (to which that person is legally married) or in the event of no spouse, blood relatives.  It is essential that same sex couples have properly executed Advanced Directives, in which they designate their partner as their "attorney in fact" for health care and other decisions.

Note: I am aware of the Langbehn/Pond case, where a hospital in Miami allegedly denied visitation to the Lesbian partner of a tourist who had a heart attack on a cruise and then later died, even though she had a properly executed health care surrogate, but I believe (hope) that instance was an aberration.  If anything, this case is evidence of what can happen without the proper documents (and an educated hospital staff that understands them).

A PROPERLY DRAFTED AND EXECUTED WILL OR A REVOCABLE LIVING TRUST, (AND/OR PROPERLY STRUCTURED JOINT OWNERSHIP OF PROPERTY OR BENEFICIARY DESIGNATIONS) IS ESSENTIAL FOR SAME SEX PARTNERS TO INHERIT EACH OTHERS PROPERTY UPON DEATH

In a previous blog post I discussed that if a person dies without a will, it is known as intestacy, and the State determines how their property is distributed per a predetermined set of rules.  While intestacy is not an ideal situation, the order in which people inherit from an intestate decedent is set up to give the decedent's surviving spouse priority over everyone else.   In Florida, when a person dies survived by a partner to whom they were not legally married (either gay or straight), then the partner has no intestate inheritance rights at all, and the Decedent's property that is subject to probate may be inherited by blood relatives that the person hasn't seen or spoken to in years, instead of by the loved one they spent their life with.

But this can be solved with proper planning.  If a decedent (gay or straight) engaged in estate planning before their death and executed a Will or a Trust leaving their property to their partner, then the problem of the "wrong" person inheriting through intestacy disappears.  Part of the problem may also be solved by owning property as joint tenants with rights of survivorship, using Pay On Death Accounts, and making sure that the beneficiary designations on life insurance and retirement accounts are properly completed.  But these steps should be done as part of an entire plan, in conjunction with a Will or Trust, as it might miss assets, which would then be subject to intestacy.

While I'm sure that the fight over gay marriage will linger on for years, same sex couples can and should take the steps necessary today to engage in proper estate planning to protect both themselevs and their loved ones.

 

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There was a short article yesterday in the Bristol (CT) Press by Connecticut Attorney Daniel O. Tully pointing out that "If your finances have changed markedly since you wrote your will, you should check your estate plan to see if you need to make any changes."  This is especially true if your plan includes "specific bequests" which are gifts of specific property upon your death.

For example, your Will might currently state, "I give, devise, and bequeath my 10,000 shares of my Citibank stock to my son Barack, and the rest, residue, and remainder of my estate to my daughter Michelle" 

Assume you executed your Will on March 16, 2004.  On that date, 10,000 shares of Citibank was worth close to $500,000. Today, after the perceptions decline in the stock market,10,000 shares of Citibank is worth about $17,000.  If you died today with those provisions in place, this could create an inequity that you hadn't intended.  Therefore, it is a good idea to review your documents to see if you made any specific bequests, and contact your estate planning attorney to discuss whether or not a change is necessary.

Also, as I have written about before, I believe that this decline in the world economy provides the greatest opportunity for gift and estate tax planning in years, possibly ever.  Note that I am not talking about Citibank, or any specific stock or asset in particular, but just assets in general.

Currently -- and I am simplifying this -- the US imposes a gift tax on the value of assets that you give away during life, and on the value of assets that you own upon your death.  One of the benefits of giving away assets now is that you are only subject to tax on the current value of the asset, and all of the future appreciation is removed from your estate and not subject to the gift or estate tax.  If you are relatively young and healthy, and you believe that in the long term that the value of the assets you own will appreciate, you should evaluate whether it makes sense to give some property to your children or even grandchildren now, so if the value of that property comes back up, it will be out of your estate and not subject to the estate and gift tax.  Even after the current stock market decline, $10,000 invested in Microsoft in early 1990 would be worth $282,200 today.  A gift of Microsoft stock in 1990 would have removed all of that appreciation from your estate.

I realize that many people are concerned about giving away assets now -- either because they do not believe that their children are ready to handle large amounts of money or they are afraid that they themselves will need the money to live later in life.  Depending on your individual circumstance, there may be solutions to each of these problems, which your estate planning attorney can discuss with you.

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 In my previous post, I discussed why a Will is essential for almost everybody, so that a person can decide how his property is disposed of upon his death, instead of having the State decide for him, per a preset list of rules.  And while planning for what happens after death is a large part of what Estate Planning Attorneys do, it's not the only thing.  Another essential element of my job is to plan for who will make decisions for my client -- concerning their health care and their finances, in the event that they are incapacitated and unable to make these decisions for themselves.  The key is that I want to avoid having a Guardianship established for my client, because Guardianships are timely and expensive, involve tremendous judicial oversight, and should only be used if there is no other less restrictive alternative. 

While a Will is about what happens after my client dies, there are three documents that I use to prepare for what should happen if my client is alive, but incapacitated -- they are a Durable Power of Attorney, a Designation of Health Care Surrogate, and a Living Will.

• A Durable Power of Attorney is a document in which the client, often known as the Principal, designates who will make decisions for them with regards to their finances and other related issues, such as opening their mail and representing them in court.  There are two types of Powers of Attorney.  The first becomes effective immediately.  The instant it is signed, the person appointed, often known as the Agent or the Attorney-in-Fact (as opposed to an Attorney-at-Law) can go to the bank and make transactions upon the Principal's behalf.  A springing Durable Power of Attorney on the other hand, does not become effective until the Principal is incapacitated, for example in a coma, or suffering from senile dementia.  Whether I recommend a springing or a non-springing Durable Power of Attorney to my client often depends on a number of factors.  These include their age, who they are choosing as their agent, and their relationship with that person.  I prefer non-springing Powers of Attorney because they are easier to get banks to accept, but that's not always the best choice for the client.
   
• A Designation of Health Care Surrogate is similar to a Durable Power of Attorney except that the Principal designates who they want to make health care decisions for them in the case that the Principal is unable to make them for themselves. For this designation, there is no "springing" vs. "non-springing" as they only come into effect upon incapacity.  Note that a Designation of Health Care Surrogate can cover any type of medical situation.  One attorney I used to work for gave the example of "Suppose you were in a coma and had gangrene in your finger.  Someone needs to make the decision whether or not to operate."
   
• A Living Will is the third document that I prepare for clients. This document expresses the client's wishes if they are in a persistent vegetative state, or an end-stage condition.  Think Terri Schiavo. The client can designate whether or not they wish to be kept on life support as long as possible, or if life support should be discontinued.  In addition, the client can state whether nutrition and hydration (i.e. food and water) should be provided or withheld.    

It is important for you to have a Durable Power of Attorney and Health Care Surrogate, so that in the case of your incapacity, there is a less restrictive alternative to a Guardianship.  A Living Will is important so that your wishes are in writing and your loved ones can be able to follow them.

 

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I meet people all the time -- single people, married people, with and without children who have none of their estate planning documents in place.  There are a number of reasons as to why people don't get their documents in order -- worry about the cost is often a reason given (although it does not have to be expensive to do).  For some, it's just general procrastination.  It's on their list of things to do along with lose 30 lbs or clean out the garage.  Yet for others, it is the fear of thinking about their own mortality or the misguided belief that a tragic and sudden death could never happen to them.  But if you have your own property, and you want to decide for yourself how your property is distributed after your death instead of having the state decide for you then you generally need a Will.

Dying with out a Will is known as being intestate.  Each state has its own laws of intestacy, determining how an intestate decedent's property is disposed of upon their death.  In Florida, the intestacy provisions are set forth in Chapter 732 of the Florida Statutes.  Under the rules:

1. If you are married and have no descendants (children, grandchildren, etc.), your spouse receives your entire intestate estate.  It doesn't matter if you were married for 3 days or 30 years.
    
2. If you are married and have descendants and all of your descendants are also children of your spouse (meaning that you have no living children or grandchildren from another relationship), then your spouse receives the first $60,000 of your intestate estate, plus 1/2 of the value of the remaining intestate estate, with the balance being distributed among your descendants "per stirpes".  If your intestate estate is $60,000 or less, then your surviving spouse receives it all.
    
3. If you are married and have any descendants who are not descended from your surviving spouse (e.g. you have children from a previous marriage), then your intestate estate is split 1/2 between your surviving spouse and 1/2 among your descendants, "per stirpes".  Your spouse does not receive the first $60,000 off of the top.
    
4. If you are not married, and have descendants, your intestate estate is distributed to your descendants, "per stirpes".
    
5. Then, if you do not have descendants, there are a series of "alternate takers" depending on who in your family is surviving.  It will go first to your parents, then your siblings, then to your paternal and maternal grandparents equally, then to your aunts and uncles, and on down the line.
    
6. Then, Section 732.107(1) provides the worst possible scenario, "When a person dies leaving an estate without being survived by any person entitled to a part of it, that part shall escheat to the state,"
    

The term "escheat" means that your property become the property of the state.  Remember, under the law "friends" have no rights to your property after you die.  If you have property and no family and lots of friends, unless you have a Will (or have made some other provision for the dispostion of your property such as a Pay on Death Account), your property will go to the state upon your death.  And if you do have family, you need a Will so that you can decide how your property is divided instead of having the law and a judge make that choice for you.

 

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One of the issues in drafting estate planning documents is that if there is a mistake in the will or the trust, it is often not discovered until many years later after the testator or grantor has passed away. Sometimes these errors are glaring, such as naming the wrong person in the will. But ofttimes, the mistake is subtle and ambiguous, and might not even be a mistake at all. However, due to the massive amount of estate and generation skipping transfer tax that could be imposed if there is a mistake, it's best to get it correct the first time. Luckily, mistakes can often be corrected, both under state law and through the Internal Revenue Service (IRS) through a process known as reformation. In Florida, the Florida Trust Code provides for Trust modification. This can be done with our without judicial approval depending upon when the Trust was executed, whether the Grantor is still living, whether the Qualified Beneficiaries consent and other factors. See Florida Trust Code Section 736.0410 - 736.04113 for more information. Even though a mistake can be modified for state law purposes, there is often the concern as to what the Federal Estate and Generation Skipping Transfer Tax consequences will be. In many estates, the tax consequences are irrelevant because the amount of money is too small. But Private Letter Ruling (PLR) 200910003 (text not yet available online), which was issued by the IRS on November 17, 2008, and per their records policy released approximately four months later is a good example of the interplay between state law modification and the tax results thereof. In PLR 200910003, the Grantor established a Trust that provided upon her death, the trust assets would be split into a Trust that was exempt from the Generation Skipping Transfer Tax or GST (Exempt Trust) and Trust that was not exempt from the GST (Non-Exempt Trust). The Exempt Trust was for the benefit of the Grantor's Daughter's descendants. The Non-Exempt Trust was for the benefit of the Grantor's Son and Daughter if living, and if not then their issue per stirpes. The Non-Exempt Trust allowed the Grantor's children to withdraw all of the Trust property at any time, which both of them did (in a future post, I'll talk about why that was a horrible decision by the Grantor's children). According to the PLR, the Exempt Trust provided that upon the death of a Primary Beneficiary (which was initially a child of the Grantor's Daughter):

The Trustee shall distribute the principal. . . of any Exempt Trust and any part of the principal of the Non-Exempt trust not otherwise subject to appointment to or in trust for the benefit of such of my descendants as the Primary Beneficiary may appoint under Will bey specific reference to this power. (Emphasis Added)

The "mistake" if there even is one is subtle. Because the Primary Beneficiary is one of the Grantor's descendants, then this paragraph may be interpreted as giving the Beneficiary a General Power of Appointment (which would cause estate tax inclusion) as opposed to a Limited Power of Appointment. The PLR stated that the Trustee would petition a local court to modify the Trust to clear up this ambiguity. The Trustee also asked the IRS for a ruling stating that as a result of the reformation, the Primary Beneficiaries will not possess nor will have ever possessed a general power of appointment with respect to the Exempt Trusts, and that as a result of the judicial reformation the exempt status of the Exempt Trusts for GST purposes will not be affected. The IRS ruled favorably. While that is all well and good, note that the user fee for a private letter ruling is $10,000; plus the costs involved paying the attorneys to prepare the PLR and petition the court for modification. The lesson is that it is important to make sure the documents are correct the first time; and to be careful, because even innocent "mistakes" could result in serious consequences.

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 On February 25th, the New York Times published an article entitled Study Estate Plans Before Laws Shift.  The author Deborah L. Jacobs, points out what most estate planners have been saying for a while -- that there is going to be a new law (hopefully) by the end of 2009.  With the lifetime exemption most likely staying at $3.5 million and with people being worth a lot less than they used to be due to the market collapse, the article states that estate planning documents should be reviewed now, to make sure that they still do what they are supposed to do.

It's important that you contact an attorney that specializes in estate planning to review your documents, to ensure they still "work."  The article discusses concepts that your estate planning attorney should be familiar with, including credit shelter trusts, family limited partnerships, and grantor retained annuity trusts (GRATs).

It also points out that it is essential that your beneficiary designations, on your life insurance and 401(k)s and IRAs are properly completed.  Your estate planning attorney should be able to assist you with that also.

 

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 If you live in Florida and own your own home, you have probably heard of the term "Homestead."  Most people in Florida think of Homestead in terms of their real property taxes -- both in the exemption from taxes that they receive, and the amount by which their taxes can be raised each year.  In fact, there are three different uses of the term Homestead in Florida.  One is the familiar property tax exemption; one is the protection of your Homestead from creditors, and one is what is known among attorneys as "devise and descent," that is rules strictly governing the disposition of your Homestead property upon your death.

In this, the first of three blog posts introducing the three types of Homestead, I will discuss the rules concerning who you may, and who you may not, leave your Homestead to in the event of your death.

First though, what, in Florida, is a "Homestead?"  A recent court case stated that "It has been said by those who labor in the area, that 'the leading cause of cerebral herniation among probate lawyers, real estate lawyers, circuit court judges sitting in probate, and appellate judges reviewing their work is the study of the legal chameleon also known as homestead." Cutler v. Cutler, 2007 WL 601866.  In other words, there is no clear answer.

Article X, Section 4 of the Florida Constitution states, in relevant part:

SECTION 4.  Homestead; exemptions.--

1. There shall be exempt from forced sale. . . the following property owned by a natural person:

1. a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family. . . 

1. The homestead shall not be subject to devise if the owner is survived by spouse or minor child, except the homestead may be devised to the owner's spouse if there be no minor child. The owner of homestead real estate, joined by the spouse if married, may alienate the homestead by mortgage, sale or gift and, if married, may by deed transfer the title to an estate by the entirety with the spouse. If the owner or spouse is incompetent, the method of alienation or encumbrance shall be as provided by law.

Other than the fact that your Homestead can be up to 160 acres if it is located outside a municipality and up to one half an acre inside a municipality, there is no real Constitutional or Statutory definition of Homestead.  But if you are a full time Florida resident who owns and lives full time in their own house, condominium, and in some cases, mobile home, you have a Homestead.  (I’ll leave the discussion of part time Florida residents a/k/a Snowbirds and Houseboats for another day).

In simplified terms, Florida law involving the disposition of your Homestead upon your death is as follows:

1. If you are not married, and have no minor children, then you are free to devise your Homestead to whomever you want.
2. If you are married and have no minor children, meaning you only have children that have reached the age of majority, or you have no children at all, you may only devise your Homestead to your spouse (and it must be a devise of the entire Homestead.  A life estate is not permissible).
3. If you have minor children, whether or not you are married, your Homestead is not subject to devise.  That means you have no say in the matter as to what happens to it after your death.

(For a far more detailed explanation, see Florida Attorney Rohan Kelley’s chart, which is posted at Juan C. Antunez’s Florida Probate and Trust Litigation Blog). 

In each case above in which the Homestead was not properly devised, or not subject to devise, the law provides that the following happens:  Your surviving spouse (if you have one) receives a life estate in the Homestead, with the remainder going to your “lineal descendants in being,” both minor children and adult children.  Your spouse gets to live in the home for the rest of their lives, and has to pay most of the costs involved in maintaining the Homestead  (as set forth in the Florida Principal and Income Act).  Your “lineal descendants” have a vested remainder interest in the Homestead, meaning they inherit the home upon your spouse’s death. 

If this is not what you wanted, there is usually nothing that can be done after your death.  However, there are ways to plan around this while you are still alive, including a properly drafted pre (or post) nuptial agreement or owning the property with your jointly with your spouse.

Far too often people from other states move to Florida and are told by their prior attorneys that their wills are “still valid,” and thus, are never updated.  While it is generally true that a will drafted in New York is valid when you move to Florida, an out of state will likely does not properly deal with the unique issue of the disposition of Florida Homestead upon your death.

The key here is to emphasize that Florida Homeowners must engage in proper planning with an attorney licensed to practice in Florida who understands the intricacies of Florida Homestead.  Otherwise, they risk having the ownership of their most important asset, their home being decided by the law, and possibly causing untold discord amongst their loved ones after their death.

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With the stock market significantly done from its all time high, many people are putting of doing their estate planning.  So the question is, is now a good time to engage in estate planning transactions?

Of course!

First, if you don't have a will or other testamentary documents, then when you die, all of your property that is not jointly owned passess by what's known as intestacy.  That means the State decides based on a pretermined formula where your property goes, and not you.

Wealthier individuals probably already have their estate planning documents in place (I hope).  But now, with a depressed economy and a down market, now is a great time to look into transerring assets to the next generation.

One thing you can do is make what's known as annual exclusion gifts.  The annual exclusion this year is $13,000.  That means you can give $13,000 to as many people as you want, tax free.  If you are married, you can give $26,000 to each of your children, their spouses, your grandchildren, etc.  Most importantly, it doesn't have to be cash.  You can give stock in companies that have declined in value but are still good solid companies.  That way, you not only remove the asset from your estate, but all of the future appreciation.

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