Wills, Trusts & Estates Prof Blog

Validity of CLATs Remains in Doubt Despite IRS Guidance

Richard Fox (attorney, Philadelphia, PA) and Mark Teitelbaum (attorney) recently published their article entitled Validity of Shark-Fin CLATs Remains in Doubt Despite IRS Guidance, Est. Plan. J. (Oct. 2010). The conclusion is below:

Until the IRS clarifies its position, there would appear to be a question as to the validity of the shark-fin CLAT as a qualified charitable lead trust, particularly one funding a back-loaded balloon payment to charity using life insurance proceeds. Because of the risk of the disallowance of the income, gift, or estate tax charitable deduction, a potentially disastrous result, planners should exercise caution in using such a CLAT and should consider alternative structures. These alternatives include those leveraging the benefits of life insurance for the noncharitable remainder beneficiaries, rather than the charity.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention. 

Deportation Trusts Gain Popularity

Wealthy immigrants with questionable status are reaching out to estate planners to shield their property and protect their families in the event that they are deported. In most situations, a power of attorney and a designation of a temporary guardian will suffice, but some situations require a full-fledged trust.

“Deportation trusts” work like conventional asset protection trusts. The settlor retains possession of the assets while he is in the United States, and the asset protection kicks in if a deportation order is served, making it harder for authorities to freeze or confiscate assets. Some possible complications include:

• To open a bank or trust account, resident aliens must register with the IRS to get an international taxpayer identification number (ITIN).
• You need to make sure that you create the trust in a jurisdiction in which self-settled trusts are allowed. Neither Arizona nor California allow self-settled trusts.
• The usual asset protection statute of limitations applies. Thus, advance planning is critical because a “Nevada deportation trust, for example, would need to hold the assets for at least two years before providing any benefit.”

Scott Martin, Deportation Trusts Become Hot Commodity with Rich Undocumented Immigrants, The Trust Advisor Blog, Nov. 28, 2010.

Testamentary Intent -- Ambiguous Holographic Words

In In re Estate of Hendler, 316 S.W.3d 703 (Tex. App.—Dallas 2010, no pet. h.), Testator handwrote a statement in which he indicated that he was now divorced and that his prior will still exists on the bottom of the last page of Testator’s valid attested will.  The trial court granted summary judgment that this holographic material was a valid codicil and acted to republish the will.

The appellate court reversed.  The court determined that fact issues exist regarding whether Testator had testamentary intent when he placed the handwritten statement on the bottom of his attested will and thus summary judgment was improper.  The court explained that there are two interpretations of Testator’s words: (1) a mere recitation of facts that he is divorced had has not revoked his will and (2) a statement that he reviewed his prior will with his divorces in mind and that his prior will still states his property disposition desires.  Because both interpretations are reasonable, the trial court erred in issuing a summary judgment.

Moral:  Attorneys should warn clients not to make self-help changes to their existing wills or prepare holographic testamentary documents because the clients may not do so correctly.

Multimillionaire Who Isn't Allowed to Spend His Money

Despite owning over $65 million in assets, Ugo di Portanova controls a single credit card with a $1,000 limit. Mainly due to his diagnosis of schizophrenia, Ugo was declared incapacitated by a Harris County Probate Judge over forty years ago. Since then, over $50 million of his inheritance has gone to trustees, bankers, accountants, attorneys, and guardians.

The most recent battle between trustees and guardians involved a $5-10 million gift to Ugo’s unpaid guardian and friend of over 36 years, Tina LaMatta.  Guardians and their attorneys argue that this gift would help cover expenses associated with potential court fights when the LaMattas inherit Ugo's personal assets upon his death as provided in his will.  This gift has been blocked by trustees for nine years, costing Ugo approximately $4.5 million in litigation expenses.

One of Ugo’s former trustees stated, “A lot of people are making a lot of money off of him.”

For more information regarding Ugo’s court battles, see Lise Olsen, A Multimillionaire Who Rarely Gets to Spend a Dime, Houston Chronicle, Nov. 29, 2010.

Special thanks to Peter Parlapiano (2011 MBA/M.S. PFP candidate, Texas Tech) for bringing this to my attention.

Wills, Trusts & Estates Blog Named to ABA Journal's Blawg 100!

Thanks to your loyalty and support, I just received notice that this blog was named to the ABA Journal's Blawg 100.

Thank you!!!

Voting is now taking place to determine the "popular" favorite in each of 12 categories -- my blog is in the Law Prof Plus category.  I would greatly appreciate your taking the time to cast a vote for this blog by following this link -- vote here.

Thanks!!!

Courts Aren't Monitoring Guardians Successfully

The Senate Special Committee on Aging requested that the Government Accountability Office (GAO) report on how well the courts are monitoring guardians to prevent abuse of the elderly. Undercover GAO investigators were able to gain guardianship certifications using two fictitious identities: one with the Social Security number of a deceased individual and one with bad credit.

The GAO concluded “that courts failed to adequately screen potential guardians, appointing individuals with criminal convictions or significant financial problems to manage large estates; did not oversee guardians once they were appointed, allowing the abuse of vulnerable seniors and their assets to continue; and failed to communicate effectively or at all with federal agencies to stop the abuse.”

Some Courts Could Allow the Dead to Become Guardians of the Living, ElderLawAnswers, Nov. 1, 2010.

CLE on Grantor Trusts

The National Business Institute is sponsoring a 90-minute national live video webcast on December 15 entitled Grantor Trusts in a Nutshell. The program description is below:

Take your estate planning mastery a step beyond simple living trusts: explore the goals and mechanics of the grantor trusts, their more effective forms and specific provision language that maximizes their potential. Enrich your estate planning technique arsenal - register today!

• Review sample trust verbiage to save drafting time, ensure legal compliance and maximize results.
• Fully utilize the unique tax-saving opportunities afforded by effective use of intentionally defective trusts.
• Learn why it's important to know when to file the tax return for grantor trusts.

Order to Account Not Appealable

In Pollard v. Pollard, 316 S.W.3d 238 (Tex. App.—Dallas 2010, no pet. h.),Husband obtained an order from the trial court to require Wife’s independent executor to account under Probate Code § 149A.  The executor had resisted Husband’s request arguing that Husband was not an interested person who had standing to request an accounting claiming that Wife had successfully divorced Husband prior to her death.  The executor appealed.

The appellate dismissed the appeal for lack of jurisdiction.  The court explained that an order to account is interlocutory and not appealable because (1) no statute declares such an order to be final and (2) the order is not part of any proceeding other than the overall independent administration of Wife’s estate.

Moral:  A trial court’s order to the executor to account is not appealable.

Top SSRN Downloads

Here are the top downloads from September 27, 2010 to November 28, 2010 from the SSRN Journal of Wills, Trusts, & Estates Law for all papers announced in the last 60 days.

Rank	Downloads	Paper Title
1	175	Financing Long-Term Care After Health Care Reform Richard L. Kaplan, University of Illinois College of Law, Date posted to database: October 16, 2010 Last Revised: October 21, 2010
2	164	Fundamentals of Texas Multiple-Party Accounts Gerry W. Beyer, Texas Tech University School of Law, Date posted to database: September 20, 2010 Last Revised: September 20, 2010
3	144	Case Law Update Gerry W. Beyer, Texas Tech University School of Law, Date posted to database: August 31, 2010 Last Revised: August 31, 2010
4	139	Lessons from the Supreme Court of Texas Gerry W. Beyer, Texas Tech University School of Law, Date posted to database: October 23, 2010 Last Revised: October 23, 2010
5	123	The Price of an FLP Annual Exclusion Wendy C. Gerzog, University of Baltimore - School of Law, Date posted to database: September 9, 2010 Last Revised: September 9, 2010
6	95	The 'Big Three' VEBAs and Other Stand-Alone Welfare Benefit Trusts: What Is and Is Not Novel about Them Andrew Stumpff, University of Michigan at Ann Arbor - Law School - Faculty, Date posted to database: November 15, 2010 Last Revised: November 15, 2010
7	92	When Do Fiduciary Duties Arise? James J. Edelman, University of Oxford - Faculty of Law, Date posted to database: October 26, 2010 Last Revised: November 13, 2010
8	90	Can a Modern Legal System Do without the Trust? Reinout M. Wibier, Tilburg University, Date posted to database: September 16, 2010 Last Revised: November 24, 2010
9	83	Access or Expectation: The Test for Fiduciary Accountability Robert Flannigan, University of Saskatchewan, Date posted to database: October 29, 2010 Last Revised: October 29, 2010
10	77	Critters in the Estate Plan Gerry W. Beyer, Texas Tech University School of Law, Date posted to database: August 27, 2010 Last Revised: August 27, 2010

Spanos Puts His Stake of San Diego Chargers on the Market for Estate Planning Reasons

I recently blogged about Drayton McLane selling the Astros for estate planning reasons. Now Alex Spanos, minority owner of the San Diego Chargers, is selling his portion of the team for estate planning reasons as well. Spanos and his wife currently own 36% of the team, their four children own 15% each, and two additional owners own the last 4%. Thus, the Spanos family will continue to own a controlling stake in the team even after Alex sells his stake.

See Bernie Wilson, Attorney: Minority Stake of Chargers for Sale for Estate-Planning Purposes, The Canadian Press, Nov. 16, 2010.

Special thanks to Peter Parlapiano (2011 MBA/M.S. PFP candidate, Texas Tech) for bringing this to my attention.

Planning Your Estate in 16 Steps

If you’ve procrastinated on your estate planning, the following 16-item list will get you going in the right direction:

1.  
   1.  
      1. Take inventory of everything inside and outside your home worth $100 or more.
      2. Take inventory of your non-physical assets, including bank accounts, retirement accounts, life insurance policies, etc.
      3. Make a list of your debts, including credit card debt, loans, mortgages, home equity lines of credit, etc.
      4. Make a list of the organizations you are involved with and the charitable organizations you support.
      5. Send these completed lists to your estate administrator.
      6. Review your accounts and policies where you previously listed beneficiary designations. 
      7. Review your life insurance policies and annuities to ensure that your beneficiaries are correctly listed.
      8. Check your accounts to see if you want any of them to have a transfer-on-death feature.
      9. Select someone who is responsible to be your estate administrator.
      10. Create a will, either with or without the help of an attorney.
      11. Review and update your documents every two years or after any major life-changing events.
      12. Send a copy of your will to your estate administrator.
      13. Meet with a financial planner or estate attorney.
      14. Create other important estate planning documents.
      15. Consolidate your accounts and simplify your life.
      16. Take advantage of college funding accounts.

For more information, see Steven Merkel, Estate Planning: 16 Things to do Before You Die, Investopedia, Nov. 2, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

Giving Gifts to Cut Taxes

People who have donated to charities with little thought in past years are likely to examine things more closely this year before donating. For those who want to see that their money is efficiently used, one of the following approaches may be better than simply writing a check:

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  •  
    • Set up a donor-advised fund. The donor deposits a large sum in the fund, cementing the tax deduction for the year. The donor can then request that the funds be donated to multiple charities for months or years.
    • Set up a charitable lead trust. The donor deposits a large sum in the trust and gets a tax deduction. The money is given to charities for years, after which the remainder goes to heirs.
    • Set up a family foundation. Family foundations give family members a specified amount of money for philanthropy work yearly. Some wealthy families like this approach because it can unite families.

See Gail MarksJarvis, Give a Gift and Cut Your Taxes, Chicago Tribune, Nov. 25, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

Family Runs Through Sudden Riches Swiftly

In 1998, Mr. Martin received a $14 million check from the sale of Martin Media, a company started by his father. After ten years of purchasing real estate, cars, horses, and mink coats, the fortune evaporated, leaving Mr. Martin, his wife, and their three young children practically broke.

Mr. Martin now lives in a $900/month rental home, compared to his multimillion dollar mansion on the lake. He now drives 14 miles to work in an 11-year old Ford Explorer, compared to the Aston Martin he drove just a few years ago. Although he’s lost a lot, Mr. Martin is thankful that he has found a job teaching winemaking classes at age 59.

Unfortunately, what happened to the Martins is not at all uncommon.  A similar result occurs when children inherit large sums of money from their parents.  They face the same temptations to indulge and don't know how to handle the complexities and pressures of new wealth.  One effective way to prevent beneficiaries from following in the footsteps of the Martins is to place the gifted assets into a trust rather than giving it to them outright.

See Geraldine Fabrikant, Family’s Fall from Affluence is Swift and Hard, N.Y. Times, Nov. 25, 2010.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.

Using Qualified Disclaimers as a Hedge for Tax Uncertainty

Among the many concerns surrounding the estate, gift, and GST tax uncertainty, some people fear that Congress will enact retroactive legislation that could destroy estate planning actions taken in 2010. Joe Luby, an investment manager in Nevada, thinks that the simple solution is a qualified disclaimer. Mr. Luby’s example of how this works is below:

Tom Clark would like to gift $2 million of marketable securities to his son Bill. He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent. The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio. The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand. Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary. The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses. And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.

Joe Luby, Qualified Disclaimers in 2010, Trusts & Estates, Oct. 20, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

Useful Tool for State Income and Estate Taxes

Yahoo! Finance has a handy tool for state income and estate tax planning. Users can easily view each state’s income, sales, property, estate, and other tax laws. Click here to access the tool.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

CLE on Managing Real Property in Estate Adminstration

The National Business Institute is sponsoring a 90-minute national teleconference on December 9 entitled Managing Real Property in Estate Administration. The program description is below:

Do you have the real estate background you need to ensure your clients' real property estate planning goals are met? Do you have the knowledge to determine the value of real estate and manage the transfer of property during estate administration? Get the information and skills you need to represent your clients' best interests with this information-packed legal guide. Don't miss this opportunity to enhance your knowledge - enroll today!

• Avoid estate tax and probate by using gifting and sale of real property during estate planning.
• Learn what real property planning techniques can work for specific clients and which ones won't.
• Learn to maximize valuation discounts by knowing what factors influence the property value and final assessment.
• Save time and money during estate administration: gain practical instruction on completing real estate related tax returns.
• Don't let property fall into the wrong hands: learn practical tips for troubleshooting title issues.
• Put your clients' minds at ease: plan for property management in case the beneficiary is disabled or a minor.

Louisiana and Penalty Clauses in Testaments

Irina Fox (Law Clerk, U.S. District Court for the Eastern District of Louisiana) recently published her article entitled Penalty Clauses in Testaments: What Louisiana Can Learn From the Common Law, 70 La. L. Rev. 1265 (2010). The abstract available on SSRN is below:

A typical in terrorem clause (also referred to as penalty, forfeiture, or no-contest clause) used in a person’s last will threatens that those who contest the will in court will forfeit their bequest. The Latin phrase “in terrorem” means “into fear.” Indeed, the clauses inflict fear not only upon the heirs but also upon legal practitioners and courts. The chief difficulty for the courts arises out of the need to balance the right of testators to freely dispose of their estate against the heirs’ right to pursue their meritorious claims. To make matters worse, testators can be extremely creative in their phraseology of penalty clauses. The judicial analysis necessarily depends on the language of the clause itself and the circumstances surrounding the contest, which makes the courts’ task even more arduous.

The difficulty in balancing the rights of testators and the rights of heirs is exacerbated in Louisiana. Few cases involving penalty clauses arose during the twentieth century, leaving Louisiana courts without the opportunity to develop a systematic approach to analyzing penalty clauses. Changes in Louisiana successions law have increased the likelihood that testators will resort to such clauses and that litigation regarding them will ensue. Due to the virtual abolition of forced heirship, a testator has more freedom in determining how to dispose of his estate. This increased freedom may prompt testators to resort to penalty provisions as a guarantee that their wills are enforced. With limited exceptions, the estate is now “freely alienable,” which allows testators to be creative in their bequests. At the same time, descendants of testators who are left out of the will are more likely to file suit challenging the will because, save in rare circumstances, they are no longer entitled to a portion of the testator’s estate by law.

This likely increase in the use and litigation of penalty clauses necessitates the clarity that this Article strives to provide by proposing a framework for analyzing penalty clauses in Louisiana. This Article presents the background of penalty provisions in Roman and French history and summarizes the trends in Louisiana jurisprudence, while at the same time identifying the gaps in courts’ analysis. It further examines the history and modern common law in search of the solution for Louisiana’s problems. Finally, this Article establishes a flexible framework for analyzing penalty provisions in Louisiana that combines Louisiana’s civil law heritage with the equitable common law approach.

Nurse Charged with Assisting Suicide Over the Internet

After Mark Drybrough’s sister Carol found him hanging from his bedroom door, she began researching her brother’s internet history, finding that he spent a significant amount of time in suicide chat rooms and that he had entered into a suicide pact with someone named Li Dao.

After years of research, it was discovered that William Melchert-Dinkel, a 48-year-old nurse from Faribault, had posed as Li Dao, falcongirl, and Cami on suicide websites, advising people about suicide methods. Sometimes he was even able to convince these people to allow him to watch them hang themselves via webcam.

In April 2010, Melchert-Dinkel was charged with advising and encouraging the suicides of Nadia Kajouji and Mark Drybrough. This is the first time that criminal charges have been brought against someone for assisting suicide over the Internet. Questions that must be answered include: Can he be held legally culpable? Would Mark or Nadia have killed themselves anyway? How much encouragement did they really need? Thus, even if Melchert-Dinkel pleads guilty or is convicted, it is not likely that he will serve much time.

See Nadya Labi, Are You Sure You Want to Quit the World?, GQ, Oct. 2010.

Leveraging Taxable Gifts with Life Insurance

Melvin A. Warshaw (attorney, Boston, MA) recently published his article entitled A “One of a Kind” Opportunity is Closing: Leveraging Large Taxable Gifts in 2010 with Life Insurance, ABA RPTE Publications, Sept. 2010. The conclusion is below:

Integrating the use of life insurance to lock in the potential significant transfer tax savings available from a large taxable gift made in 2010 assures a successful wealth transfer planning transaction. The biggest risk – that the donor dies within three years of making a large taxable gift on which significant tax is paid and that must be included in the donor’s gross estate – has been hedged by purchasing some life insurance.

Careful policy selection can provide either short-term optionality or predictable long-term investment returns. For those policyholders and insureds who want to reassess their options once the donor survives the three years lookback (estate inclusion) period, use of a UL policy with an “early cash value rider” preserves a variety of options: surrender the policy for the amount paid (and no tax consequences), settle (sell) the policy perhaps for an amount in excess of the cash value or exchange for a new policy that might provide access to favorable mortality tables.

CLE on Estate Administration

The ABA Section of Real Property, Trust & Estate Law is sponsoring a 90-minute teleconference and live audio webcast on November 30 entitled An Overview of Estate Administration: From Beginning to End. The program information is below:

This program is a soup-to-nuts introduction to estate administration. It will provide a roadmap of the probate process and exploration of alternatives to probate.

During the presentation our panel of experts will discuss:

• The steps from opening to closing a probate estate;
• Gathering information and commencement of proceedings;
• Marshaling assets;
• Appointing the personal representative;
• Preparing the inventory and valuing assets;
• Defending the estate from claims;
• Making distributions and closing the estate;
• Practical checklist of the estate administration process.