Ronald Morton's Elder Law 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.

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. 

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.

Trusts Can Enhance FDIC Protection over Savings

Are you concerned about the safety of your bank accounts? If so, your fears are justified: Earlier this year the Federal Deposit Insurance Corp. (“FDIC”), which backs bank deposits, reported the biggest jump in "problem institutions" it has seen since the savings and loan crisis of the late 1980s. The FDIC identified 76 banks in trouble, a 52% increase from just one year ago. In fact, some experts predict as many as 200 bank failures could occur in the next few years.

Malpractice Claim Against Estate Planner Time Barred

A Kansas appeals court rules that because an estate's malpractice claim against an attorney who prepared estate documents is grounded in tort law and the injury did not occur during the decedent's lifetime, the cause of action did not survive the decedent's death. Jeanes v. Bank of America  (Kan. Ct. App., No. 97,855, Aug. 29, 2008).

POA Gifting Power Not Unlimited

A Pennsylvania appeals court rules that a durable power of attorney that allows the agent to "make gifts" does not accord the power to change retirement plan beneficiaries or to make large gifts of personal property absent specific authorization in the document. In Re: Slomski v. Thermoclad, et al (Pa. Super. Ct., Nos 1330WDA2007 & 1400WDA2007, July 29, 2008).

Exciting New Developments in Buy-Sell Planning

This article examines exciting new developments in business succession planning - specifically, the use of LLCs or partnerships to own life insurance for buy-sell planning purposes.  Such a structure obtains the advantages of cross-purchase and stock redemption buy-sell agreements without many of the disadvantages of either traditional structure.  This development is significant to all wealth planning professionals and their business-owner clients.

Attorney Suspended for Assisting Direct Mail Estate Planning Marketer

The Supreme Court of Ohio suspends an attorney for two years for preparing estate planning documents for clients solicited by a company that uses direct-mailings to market estate planning services in Ohio and other states. Ohio State Bar Assn. v. Jackel (2008-Ohio-1981, May 1, 2008).

Non-Spouse Beneficiaries of Retirement Plans May Convert to Roth

A recent IRS notice seems to permit beneficiaries of inherited retirement plans and IRA's to convett those inherited accounts to a Roth IRA.  Notice 2008-30 provides guidance about the distribution provisions of the Pension Protection ACt of 2006.  Prior to this Notice, only spousal beneficiaries had this option, via the spousal IRA rollover privilege.  Non-spouses did not have this option.  "If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA." IRS Publication 590 (2007).