Ronald Morton Legal Blog

Michael Jackson's Will Tells Us a Lot by Telling Us Very Little

The Will of Michael Jackson was filed in Los Angeles Probate court yesterday.  Michael Jackson's Will.  From the will we really learn very little about the ultimate distribution of Jackson's large estate.  The entire estate is payable into the Michael Jackson Family Trust.  It appears that this "Family Trust" is a revocable living trust, given the statement in the will that Jackson himself was the initial trustee and trustor of the family trust, and the fact that is was amended and restated in 2002.  Beyond that, the will names the executors, makes sure to disinherit his ex wife, and containes some boilerplate language dealing with taxes and probate in other states. 

What we do learn from the will is the significant privacy benefits of an intervivos trust.  Unlike a will, a trust is not required to be filed in the public records, so beyond knowing that a trust exists, we know nothing of the beneficiaries, or even the trustees, of the trust.  The probate records will eventually tell us what property passed through probate into the trust, but even that will not give us a complete record of Jackson's estate since we have no knowledge of what other assets may already be in the estate. 

There has been speculation that the trust divides the esate between Jackson's mother, children, and charities, but there is no way to confirm any of this without disclosure of the trust document, and that privacy is precicely why Jackson chose a trust to manage his estate.  In doing so, Jackson joined a long line of celebrities who handled their affairs privately through a revocable living trust, including Paul "Bear" Bryant, Frank Sinatra, John Lennon, and John F. Kennedy. 

Celebrities Die Just Like the Rest of Us, Only with more Public Disputes

Last week saw the sad loss of 4 entertainment icons.  Some of my earliest memories of TV with my fatherat the age of 4 were of watching Ed McMahon as Johnny Carson's loyal sidekick.  Farrah Fawcett was, of course, my favorite Angel every Wednesday night, even if only for a single season (but my mother would not let me get the poster). Michael Jackson's "Thriller" was the defining music of my junior and senior years in high school.  And Billy Mays, while arguably not in quite the same legue, has been a constant pitch man on infomercials for the past decade, with a sort of honest, if not annoying, characteristic about him.

This cluster of deaths should remind us all of our own mortality, and the need to get our affairs in order.  Ed McMahon was survived by his wife, as I understand it, and so I do not anticipate his estate to be controversial, although media accounts of his indebtedness may leave little in the way of a legacy.  Little is known about Farrah Fawcett's and Billy Mays estates at this time.  But Michael Jackson's estate promises to be a media circus even larger and more complex than those of James Brown estate and Anna Nichole Smith all rolled into one.  Initial accounts indicate that there will be a Will contest over the existance and validitiy of at least 1 will.  Already we have seen initial custody battles over the three Jackson children, with no doubt, more to come.  There will be numerous creditor claims, not the least of which will likely be from more alleged sexual abuse victims whose previously supressed memories will now be lifted as a result of his death, and can now come forward with their claims against the Jackson estate. 

Sadly, Jackson's estate presents a compelling case for planning.  Nothing in his estate is unique other than its scale and his celebrety status.  But every one of the disputes that has been or will likely be raised in the Jackson estate I have seen first hand in numerous estates of regular people right here in Mississippi, not all in a single case, to be sure, but the disputes themselves are actually altogether too common.  Just as these types of disputes are all subject to occur in the estates of regular people, they are all also avoidable, both by regular people and superstars alike, with a little bit of proper planning.  A parents wishes for custody of their children can easily be handled through a declaration of their wishes in their will.  Creditor claims can frequently be avoided through a device such as life insurance payable to an irrevocable life insurance trust, or payable into a family sentry trust, to protect ones legacy against creditors.  Estate taxes can often be addressed through an ILIT along with numerous other planning mechanisms. 

There are a couple of lessons in the deaths of these 4 to all of us.  Death comes to us all, and with a little planning,we can make our passing a lot easier on our heirs.

Medicaid will Stop Provider Payments

In a letter to Medicaid providers, such as nursing homes, dated June 19, 2009, the Division of Medicaid announced that, due to the state's budget crisis, it was out of money and would cease all provider payments until it received funding.  The letter points to a $39 million shortfall in current budgeting.  Once providers notify Medicaid recipients that their coverage has been discontinued, I presume the plan is for public outcry to place pressure on the legislature to find a method to fund the program - presumably using the hospital tax that the governor wants, since the Division of Medicaid falls under the executive branch and no doubt sent the letter at his direction.

Make the Children Pay?

One writer recently speculated that states could begin looking to children to pay for the Nursing Home and other medical expenses incurred by their parents and paid by Medicaid.  Article here.  Specifically, the suggestion is that Miss. Code Ann. Sec. 43-31-25 be used to require reimbursement from children for the nursing home or other Medicaid expenses of the parent.  While such a cost recovery scheme may be tempting to cash strapped Mississippi, it would also be illegal.  Federal Medicaid law prohibits states from seeking reimbursement from children for Medicaid expenditures.  The law requires the state, however, to seek recovery of those expenses from the estate of the Medicaid beneficiary.  This is known as "Estate Recovery."  So, parents receiving Medicaid benefits who wish to pass down some legacy to their children must do some pre-planning if they wish to protect some of their assets from forfeiture to Medicaid.  If you have questions about how estate recovery can effect your family, feel free to email me or schedule an appointment. 

Medicaid on Twitter?

The Communications office at the Mississippi Division of Medicaid is apparently on Twitter.  @Medicaid_Truth.  Posts seem to be somewhat political in nature, although I applaud the agency's attempt to use new technology to communicate.  Technology leadership has not been my experience with my usual dealings with Medicaid.  Thanks to www.mississippidemocrats.org for the story. 

Joint Tenancy in Estate Property

Occasionally the issue of joint tenancy arises in an estate, usually in the context of bank accounts.  The common fact pattern is as follows:  Parent names one child as joint owner on his/her checking account for convenience, so that the child can assist with paying bills for the parent.  The Parent has language in his/her will distributing all assets of the estate equally among the children.  When the parent dies, the child named on the bank account takes the position that the bank account is solely  his property by virtue of surviving. 

While there is some case law to support the argument that individuals named on an account solely for the convenience of the owner do not become the property of the survivor, most of the case law in Mississippi suggests that the survivor becomes the sole owner of the property.  This may even be true where the property is specifically identified in the will as being divided equally.  The reasoning is that the will only controls estate property and property that is held as joint tenancy with rights of survivorship never becomes part of the probate estate if there is a survivor.  One of the key factors to look at is whether the property is actually held as JTWROS, or is simply held "jointly", which may be interpreted as "tenancy in common."  In case of the latter, half, or possibly more, of the assets in the account likely belong to the estate and not to the survivor.  Such events are a far too frequent occurance and can be avoided by simply coordinating the terms of the will with actual title to the property. 

The Imporance of Adequate Planning (and a good forfieture clause)

I am witting this post while sitting in the Chancery Courthouse of Leake County, Mississippi, waiting for my turn before the judge to get an order signed.  The matter in front of mine illustrates the importance of adequate estate planning.  The case involved a lawsuit between the niece of a decedent and the decedent's wife.  The lawsuit involved the transfer of some CD's, approximately $200,000, to the wife prior to the death of the decedent.  At first I thought the case was going to involve transfers by the wife on husband's behalf using the power of attorney, but as the testimony developed, it turned out that the banker, who personally knew the decedent, carried the transfer papers to the hospital where the decedent was a patient.  By all accounts the decednt understood what he was doing and had the legal right and capacity to make the transfers.  Nevertheless, the parties and the court spent a day and a half on testimony trying to prove the decedent did not have capacity, or was unduly influenced, to make the transfer.  The court ultimately ruled in favor of the wife, but at the expense of thousands of dollars to all parties who saw it necessary to try this case in open court.  The lesson to be learned is the imporance of including a good forfieture clause in one's estate plan to make parties think long and hard before bringing such an action.  I suspect that if the will had a clause that disinherited the niece in the event of any such challenge, that this action would never have been brought.  It also shows the importance of being prepared in the event that there may be a challenge to capacity.  It is important when such a challenge is expected to have good witness testimony available, and possibly an expert, to defeat such a challenge am ensure that the wishes of the decedent are carried out. 

Post Death Conflict over Account Beneficiaries Can be Avoided

Over the past several weeks I have had occasion to address an all too common circumstance surrounding surprise beneficiary designations. Unfortunately, these "suprises" usually only become known at the death of the account owner when the surviving spouse or children seek to claim benefits they were expecting, only to discover that the beneficiary designation contains a different name from what was expected. Unfortunately, these surprises often turn into family disputes, often between the decedent's children and their step-parent, the decedent's 2nd spouse. These types of disputs usually take one of three common themes:  (1) the decedent executed the beneficiary form many years prior and had simply forgotten or did not realize the need to change his designation following a change in his circumstance; or (2) the decedent remarried subsequent to filling out the beneficiary form, often giving legal intervening rights to the surviving spouse that the decedent may not have even known existed; or (3) the decedent named his then spouse as beneficiary and later divorced, but forgot to execute a new beneficiary form after the divorce naming new beneficiaries.  To add to the confusion, spouses are given priority rights as beneficiaries to some plans, like 401(k) plans, which rely on federal ERISA law, but hold completely different rights, or no rights at all, under other types of plans, such as IRA''s or 403(b)'s, which are not governed by ERISA. 

Sadly, all of this confusion and conflict can be avoided through simple planning.   Everyone should periodically reviewed their beneficiary designations, and if there is any doubt, simply file a new designation of beneficiary. This is the only way to ensure with certainty of the decedent's wishes are carried out, and completely avoid unnecessary disputes between family members.  Over the past several years, our office has been able to help many spouses receive the retirement benefits to which they were legally entitled, albeit at a heavy price of family harmony.  The families would have been far better off had these matters been directly addressed by the account owner before death.

Can my Estate take care of my pet?

In modern society, our pets are an important part of our families. We take them to the groomer so they look their best, take them to the doctor when they are sick, and take them to stay in the “Pet Hotel" or “Spa” when we travel. We even pay extra so they get played with while we are out of town.  Our desire to care for our animals after our death is only natural.  Indeed, while common pets like dogs and cats may only live a few years beyond our death, more exotic pets like reptiles and birds have a life expectancy much greater than their human owners. Many states have specific laws that allow the creation of a “pet trust." A pet trust is simply the set-aside of money and perhaps other property, for the specific purpose of caring for animals. Currently, Mississippi does not have a specific statute on trusts, and there are no Mississippi cases declaring such trusts to be valid. However, many other states do provide specifically for pet trusts. The most notable pet trust in recent years is the one created by Leona Helmsley, who left $12 million dollars in trust for her dog. One solution to the dilemma of caring for Mississippi pets is to simply set aside a sum of money to an individual with a stated preference that the funds be used firs for the care of the animal during its remaining life. However, if an individual wants to provide, with full certainty, that the trust will be enforceable, they should execute a trust that is formed under the laws of one of those states that specifically provide for creation of the pet trust.

Favorable IRS Ruling Allows Substitution of Assets in GRAT

In Private Letter Ruling 200846001, the IRS ruled favorably for the taxpayer with regard to a Grantor Retained Annuity Trust, or “GRAT,” that contained a provision allowing the grantor, or creator of the trust, to substitute assets of the GRAT for other assets of equivalent value.

A Grantor Retained Annuity Trust is a “freeze” technique used by individuals with taxable estates.  Assets that are expected to appreciate in value are contributed to a grantor trust.  A grantor trust is a trust that is disregarded for income tax purposes – meaning it is treated as the alter-ego of the taxpayer.  Because the grantor trust is disregarded for income tax purposes, there is no recognition of gain when the assets are transferred to the GRAT.  The grantor retains a beneficial interest in the GRAT, thus the name Grantor Retained Annuity Trust.  The beneficial interest comes in the form of a series of payments, or an annuity, that will be paid back to the grantor.  At the end of the annuity term, any remaining assets in the GRAT are distributed, either outright to or in trust for, the remainder beneficiaries.

Let’s look at a simple example of how this might work in order to see the estate planning benefits.  A taxpayer creates a start-up business that is currently valued at $1 million.  The taxpayer expects the value of the business to explode in the future.  For purposes of this illustration we will assume a 20% growth rate.  The taxpayer transfers the business to a GRAT with a five-year term.  As part of the transaction, the taxpayer will receive a $222,109 annuity payment for each of the next five years.  Given that this is a start-up company, this payment would probably be paid by returning some of the stock of the start-up company to the taxpayer each year.  Using a formula provided by the IRS, we can calculate that the present value of the five payments of $222,109 is $1 million.  Because the present value of what the taxpayer gets back is equal to what the taxpayer put into the GRAT, there is no gift tax to be paid as a result of the transfer.  However, if the company does in fact increase in value by 20% annually, the value of the remaining stock at the end of the five-year period would be $835,477.  The taxpayer would have frozen the value of the assets contributed to the GRAT, effectively getting the $835,477 out free of gift tax.

An advantage of the “zeroed-out” GRAT (this is a GRAT where no gift tax is owed) is that it is a “no harm, no foul” planning strategy in the event the assets do not appreciate as anticipated.  This is especially important in our current uncertain economic environment.  Had the start-up business in the example turned out to be a bust, there would be no loss to the taxpayer since there was no use of gift tax exemption to shelter the failed gift.

The taxpayer in PLR 200846001 wanted to contribute the shares of two separate companies to the GRAT.  The GRAT contained a provision allowing the grantor to substitute trust assets for other assets of equivalent value. This provision, which is defined under IRC § 674, is commonly used to make a trust a grantor trust for income tax purposes.  In order to qualify as a GRAT, there must be a provision in the GRAT prohibiting additional contributions to the trust after its formation.  The taxpayer desired to contribute the stock in two publicly traded companies on the initial funding of the GRAT, but retain the right in the future substitute shares of company 1 for an equivalent value of shares of company 2 or shares of company 2 for an equivalent value of shares in company 1.  The taxpayer’s advisors were concerned that while the right to substitute assets is not a problem for income tax purposes under IRC § 674, it might cause the GRAT to be disqualified under IRC § 2702, or cause inclusion of the GRAT assets in the grantors estate after death under the provisions of IRC §§ 2036 or 2038.  The IRS ruled that the substitution of assets would not disqualify the GRAT under IRC § 2702, or cause inclusion under IRC §§ 2036 or 2038.

A GRAT is a very powerful planning tool for individuals with taxable estates, especially those individuals who have or plan to use their lifetime $1 million gift tax exemption amount on other planning strategies.  It is a freezing technique that allows the future appreciation of assets to be removed from the estate of the taxpayer at little to no cost.