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

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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I have written in the past about the dangers of "do it yourself" wills.  I have pointed out all of the traps for the unwary regarding Homestead, the Surviving Spouse, and Pretermitted Heirs.  One thing I haven't written about is the danger of improperly signing the document.  If the proper procedure is not followed, it does not matter how good the Will is, and it does not matter what the signer's intent was.  An improperly signed Will is invalid, and the estate passes through the laws of intestacy.

(Like always, this post only covers the law of Florida.  The laws in other states may vary).

In Florida, the laws regarding the execution of Wills is covered by Florida Statute 732.502.  Under the statute, every will must:

1. Be in Writing;
2. Signed by the testator, or if the testator is unable to sign (say due to paralysis), signed by some other person in the testator's presence and at his direction;
3. The Will must be signed in the presence of two witness who are also in the presence of each other.

I can't tell you how often people mess up #3 above.  When I do a Will Signing, me, the testator and the witnesses all sit at a single table, and no one leaves until everyone is done signing.  I will serve as the notary.  

A handwritten will without two witnesses, is invalid.  A Will in which the testator's signature is notarized but there are no witnesses is invalid.  If you take the Will to the bank, and one person Witnesses the signing, and then goes and gets another teller (who did not witness you or the other witness signing), then that Will is invalid. 

The law is strict and unforgiving, and there are no exceptions at all.  If the Will is invalid then the estate passes by way of intestacy, in which there is a predetermined formula as to how the assets are distributed.   

So even if the "DIY" Will is perfectly drafted, if it is improperly executed, then it is invalid.

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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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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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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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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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I was at a networking event today, and I was talking with a guy in his twenties -- healthy, unmarried, no children, minimal assets and minimal debt.  He said he wanted to talk to me about me doing a "revocable living trust" for him.  When I asked him why he thought he needed one, he didn't know.  He had heard about them on the radio or read an advertisement for a seminar on revocable living trusts, and he decided that he needed one.

He doesn't.

First, "What is a Trust?"  A trust is an entity created by a "Grantor" or "Settlor" (the words are synonymous), to hold property for the benefit of beneficiaries.  The laws of Trusts are based both upon each individual state's statutes, and the Common Law.  In this blog post, I will be writing based on my experience primarily as a Florida Estate Planning attorney that drafts Wills and Trusts, and the laws may be different in your State.  Generally, there are two types of Trusts -- Revocable Trusts and Irrevocable Trusts.  The term "living" merely indicates that it was created by the Grantor when he was alive, as opposed to a Testamentary Trust, which is created from the Grantor's Will, upon their death.

The two types of trusts are self-descriptive.  When a grantor creates an Irrevocable Trust, he is irrevocably transferring whatever property he is choosing to transfer to the Trust.  He has given the property away, and has not retained any rights to revoke the trust or to take back the property.  Irrevocable Trusts are often used for gift and estate tax planning, medicaid planning, and asset protection planning.  They are also useful in situations in which the Beneficiaries are not ready to receive the property outright, or in which the Grantor might want to protect the assets from a Beneficiary's creditors.  Depending on what the goal is, it is possible for the Grantor to also be Trustee of the Trust, but often he is not.  But the key is that it is a permanent transfer of the property to the Trust by the Grantor which can not be revoked.

A Revocable Trust (or Revocable Living Trust) is a Trust that can be revoked or amended by the Grantor at any time for any reason.  The Grantor can cancel the Trust entirely, change its terms, and add or remove property to the trust.  In most cases, as long as they are healthy and mentally competent, the Grantor is also the Trustee of their own Trust.  A Revocable Trust becomes Irrevocable upon the Grantor's death.  Like a Will, it provides how property is disposed of upon the Grantor's death, and how property should be managed if the Grantor is still alive, but becomes incapacitated. 

The sole purpose of a Revocable Trust is to avoid probate upon the Grantor's death, and to avoid a Guardianship if they are alive and incapacitated.  However, in order to successfully avoid probate, all of a Grantor's assets must be retitled in the name of the Trust.  Any asset subject to probate not owned by the Trust would require to be probated.  In addition, a Guardianship can be avoided by having a properly drafted and executed Durable Power of Attorney and Health Care Surrogate.

A Revocable Trust will often add complexity and cost to a client's estate plan, and if they are not properly funded, they do not accomplish probate avoidance anyway.  For older clients, a Revocable Living Trust, is a good idea and is worth the extra cost and effort to properly fund and administer it.  But for a younger person, a Will, along with properly executed Advanced Directives work just fine.

A final note:  There are people out there providing "seminars" on Revocable Trusts, in which their basic theory is that everyone on earth needs one right away, and needs to buy one from the person giving the seminar.  Be wary.  These presenters are often not attorneys, and are providing fill in the blank documents that are not custom tailored for you, the client.  Anyone who claims to know what you need before talking to you as an individual, and wants to sell you the same fill in the blank document that they are selling to a room full of fifty people should be treated with extreme skepticism.

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