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

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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The Florida Legislature has made a number of tweaks, some major, mostly minor, to the Florida Probate Code in 2009.  My summary of the minor revisions are below. The statute went into effect on July 1, 2009. First, the minor changes.

1. In Section 731.201, the term "Incompetent" has been changed to "Incapacitated" (and the definition revised) and the term "Minor" has been added.  Additionally, whenever "incompetent" previously appeared in the Code, that term has been changed to incapacitated. 
2. Section 732.108 had been clarified to provide that Chapter 95 concerning adverse possession and the limitation of the claims of certain heirs in an adverse possession case, is not applicable with regards to determining whether a child born out of wedlock can inherit from its father or father's relatives.
3. Section 735.203 is amended to provide that when filing a Petition for Summary Administration (which is an abbreviated probate process for estates that are worth less than $75,000), if the Trustee of a Trust that is a beneficiary of the estate signs on to the Petition, then each Qualified Beneficiary of the Trust shall be served formal notice of the petition, unless joinder or consent is obtained from the Beneficiary..  This is actually an important provision.  Some courts, before issuing an order of summary administration were requiring the consent of all qualified beneficiaries, and some were not.  This amendment clarifies that if the Trustee/Petitioner is unable to obtain all of the Qualified Beneficiaries of the Trust, then it may serve them Formal Notice instead.
4.  Section 736.0802 is amended to impose stricter rules on what type of investments a Trustee may make, and whose consent it must receive before doing so. 

But the two major changes to the law involve the elective share and disclaimers, which I shall discuss in my next post.

Link to Original Legislation

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However, I just received an email from a scam artist claiming he did.  I hope that everyone knows that these types of email are always false and are always scams.  Michael Jackson did not leave you money in his will, and the widow of the prince of Nigeria doesn't need your help getting $10,000,000 out of the country.  Also, in the event that someone has died and left you something, in all likelihood you will be contacted in a method other than email.

This message made it past my junk mail filter.  I'm not sure why.  Normally, I'd just delete these obvious scams and move on.  But I have to say, as an attorney who practices in the area of trusts and estates, I was very amused.  

First, the email is from "BARRISTER JOHN BRANCA [[redacted]@yahoo.com.hk]"  Let's ignore the fact that the email is from Hong Kong.  The scammer made a major error here by calling himself "Barrister."  In many countries, the job of a lawyer is split into two professions -- a barrister and a solicitor.  Generally, the barrister is the lawyer that goes to court, and the solicitor is the lawyer that does everything but go to court (it's more complicated than that).  

However, in the United States, there is no such thing as a barrister or solicitor.  All lawyers can be both or neither.  So his use of the term "Barrister" shows that he knows absolutely nothing about the United States legal system.  Not a good first step.

Here is the rest of the email in its entirety.

 

Hope you receive this message!!!

On behalf of the Trustees and Executor of the estate of Late Michael Jackson. I once again try to notify you as my earlier letter were returned undelivered. I wish to notify you that late King of Pop. Michael Jackson made you a beneficiary to his WILL. He left the sum of Five Million, Dollars (USD$5,000.000.00) to you in the Codicil and last testament to his WILL. This may sound strange and unbelievable to you, but it is real and true. Being widely entertainer, he must have been in contact with you in the past or simply you were nominated to him by one of his numerous fans abroad who wished you good. Late Michael Joseph Jackson until his death was a member "MJFC" The Michael Jackson Fan Club and the Institute of entertainer. Please if I reach you as I am hopeful, endeavor to get back to me as soon as possible to enable me conclude my job. You are advice to contact me with my personal email: [redacted]

 

Okay, I'm only pointing out some of the errors I see as a probate attorney.

1. That should be "made you a beneficiary of " his Will, not "to."
2. Not only that, as I have previously written, Michael Jackson did not leave anyone anything in his will.  The Will is a "pourover" will, meaning that it leaves everything to a Trust, and the Trust makes dispositions of the assets.  The Will is public; the trust is not.
3. The email then says, "He left the sum of Five Million, Dollars (USD$5,000.000.00) to you in the Codicil and last testament to his WILL."  This sentence does not make any sense.  It seems like the writer does not know what the term "Codicil" means, and hopes his recipient won't either.  Simply, a Codicil is an amendment to a Will.  When a person wants to change their Will, sometimes instead of rewriting the entire Will, they will issue a Codicil, which would only amend a page or a paragraph, or a section or a sentence.  Codicils were much more common in the days before computers and laser printer, when rewriting a 50 page Will could be a major undertaking.

The other errors of spelling and grammar and just general ridiculousness are easily spotted, whether or not you are an estate planning attorney.  What's sad, is that these emails actually work.  There will be some poor fool out there who will be taken in, and will soon discover that in order to receive their inheritance, they will have to pay money to the scam artist.

But note to scam artist: Stick with Princes of Africa and not Kings of Pop -- you'll be more successful. 

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Below are some articles from other blogs that I read.  All of these blogs are in my RSS Reader and I find them essential in keeping up with the world of probate, tax, and estate planning.  Note that these are not all of the blogs that I read.  Just some of them that had posts over the past week or so that I thought my readers might find interesting.

1. Ask the Taxgirl: Income Tax on Gifts (Cliff's Notes: There is none)
2. The Tax Lawyers Blog: 4 IRS Forms to Know if you are Getting a Divorce
3. Don't Mess with Taxes: Back to School. Tax Holidays on Tap
4. Elder Law Today Podcast: I have a Living Trust, So I'm covered, right?
5. Tax Guru-Ker$tetter Letter (no article in particular, but a well writing and amusing tax blog)

Again, this list is by no means complete.  It's just a few things that caught my eye recently.

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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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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 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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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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I came across an article written by Christopher Yugo in the Times of Indiana.  According to the article, Mr. Yugo is a member of the Indiana Bar and a vice president and senior trust officer for First National Bank's Trust Department.  The following question and answer (reposted here in part, see the original for the whole) appeared in last week's column.

Q: My wife and I own a timeshare. Should it be titled in our trust? If so, how do we go about doing that?

A: Timeshares are fairly common assets that people own. I see them coming up in estate plans fairly frequently.

In my opinion, it should be titled in the name of your trust. Let me preface this by saying my knowledge of timeshares is somewhat limited. However, it's my understanding that most timeshares are deeded interests in real property. In other words, you own a small undivided interest in a building and/or land. If you bought a timeshare, you likely received a deed demonstrating your ownership interest.

Since you have an interest in land hopefully in another warmer state, your family could face the prospects of the dreaded ancillary estate. An ancillary estate is a probate estate that is opened in a jurisdiction other than Indiana to administer out-of-state property. If your timeshare is in sunny Florida, an estate may need to be opened there to transfer ownership.

Fortunately, timeshares tend to have a limited value so any ancillary estate proceedings may take the form of an informal process such as using a small-estate affidavit. Unfortunately, I can't tell you that for sure. Every state has its own rules.

One way around the ancillary-estate issue is to transfer ownership of the interest to your revocable living trust. As we all know, one of the benefits of using a trust is avoiding probate.

Mr. Yugo is absolutely right.  As a trusts and estates attorney that practices in Florida, the state that probably has more timeshares than anywhere else, I have seen this hundreds of times.  As he points out, a timeshare is generally an interest in real property -- just like a house, an apartment, or a parcel of land.  While personal property may be probated in the state where the decedent is domiciled, real property must be probated where it is located.

I have handled dozens, if not hundreds of ancillary estates for families with a loved one who lived out of state, but owned a timeshare in Florida.  Depending on the circumstances, these cases can cost the family between $1200 and $1800, plus court costs.  Under Florida law, they may not be handled by an out of state attorney.  Only a Florida attorney can practice in front of Florida courts. 

Usually these could be handled by what's known as Summary Administration, which in Florida is for estates worth less than $75,000, as timeshares generally are.  While I certainly don't mind the business, I do feel bad that these families have to go through with this, when need for the ancillary probate could have been avoided with proper planning.  If the Decedent had transferred the timeshare to his or her revocable trust before death, probate in Florida would not have been necessary.

Another big mistake that I've seen on more than one occasion is a husband and wife who purchase their timeshare together, but for some reason the deed specifically states that the property is held by them as tenants in common, and not as joint tenants with right of survivorship or as tenants by the entirety).  Generally, unless they are purposely splitting assets for their own reasons (for example it is a second marriage and they want their share to go to their separate children), property is held jointly by spouses, so that when the first spouse dies, the second automatically inherits the property by operation of law, without any probate necessary.  In each and every situation that I've come across in which a timeshare is owned by spouses as tenants in common and not jointly, the surviving spouse told me that that was not their intent, and that they had no idea it wasn't titled properly.

So, if you own a timeshare, a condo, or any other real property in a state other than the state that you live in, you should talk to your estate planning attorney to see whether or not it would be wise to transfer your timeshare to your revocable living trust.  In addition, check to make sure that the deed is titled properly with you and your spouse.

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