Wills, Trusts & Estates Prof Blog

Jackson's Estate Tax

One source estimates that Michael Jackson's estate could be liable for $80 million in estate taxes.  The estate tax is usually due 9 months after the individual dies, however, payment plans are available as are interest-bearing extensions. 

The exact amount of estate tax will depend on the amount of debts.  The federal estate tax is 45% of the estate after a number of deductions are applied, including charitable transfers, funeral costs, and attorney fees.

Had Michael Jackson died 6 months later, his estate could have benefited from the current plan for no federal estate taxes in 2010; however, this law will likely change before it takes effect.

See AP, Big Tax Bill Looms For Jackson Estate, CBS News, July 10, 2009.

The History of U.S. Inheritance Laws

Adam J. Hirsch wrote an interesting article on the evolution of inheritance laws in the United States.  The article is divided by time period.

The colonial period: 

• Authority over inheritance of personal and real property was handled by one court as opposed to two as it was in Great Britain.
• Intestacy laws turned to a more equal, if not totally equal, intestacy rule for children.
• Virginia introduced the holographic will as an exception to witness requirements.

The American Revolution:

• Equal treatment of children in intestacy spread to all states.
• Entails, or restrictions on land ownership limited to the testator's descendants, were abolished in most states.

The Nineteenth Century:

• Inheritance rights of a surviving spouse grew: Texas introduced the first surviving spouse homestead right guaranteeing the surviving spouse a life estate in the family home; more states gave personal property inheritance rights to the surviving spouse; all but one state provided a forced share for a surviving spouse; the surviving spouse begins taking through intestacy to the exclusion of children.
• The use of trusts greatly expanded: The spendthrift trust developed to keep creditors away from trust funds, business and pension trusts emerged, and the prudent investor rule emerged.

The Twentieth Century

• The Rise of Federal Taxes: The estate tax, which had been used only during military crisis, became a permanent institution; the gift tax was enacted simultaneously; the generation skipping tax was later introduced.
• Trusts Expand: the dynasty trust resulted when states began abolishing the rule against perpetuities and the living trust became an inexpensive and popular alternative to a will.

The author notes that the field of law as a whole remains a low priority for legislatures, and as a result, new cases involving alternative reproductive technology are solved with laws enacted as early as 1836. 

See Adam J. Hirsch, Inheritance: United States Law, 3 Oxford International Encyclopedia of Legal History 235, (Stanly N. Katz ed. 2009).

Michael Jackson's Funeral as an Estate Tax Deduction?

The media coverage of Michael Jackson's extravagant public memorial left some asking whether the expense of it all is deductible for estate tax purposes. 

Under applicable regulations, only the portion of funeral expenses paid for with estate property subject to claims against the estate can be deducted.  Also, the deduction is for reasonable expenditures, with reasonable varying from case to case.

The costs of Jackson's private funeral, transportation to place of burial, and the actual place of burial are likely deductible; however, it is questionable if the amounts spent on the public memorial are deductible because it really was not part of his funeral.

Special thanks to David Shulman for providing this information.  See David Shulman, Are Michael Jackson's Funeral Costs Deductible for Estate Tax Purposes?, July 8, 2009.

Who Bears Estate Tax on Gift Tax?

Bridget J. Crawford (professor of law, Pace University) and Jonathan G. Blattmachr (attorney, Milbank, Tweed, Hadley & McCloy LLP) have posted on SSRN their article entitled Estate Tax on Gift Tax: The Liability Conundrum, Tax Notes, June 28, 2009.

The abstract of the article is below:

This article addresses the specific question of who -- as between the beneficiaries of the estateand the lifetime donees -- will bear responsibility for estate tax generated with respect to gift tax included in the decedent’s gross estate, absent a specific provision to the contrary. Although some case law suggests that the donee of the lifetime transfer should pay the taxes, this result is at odds with the Uniform Estate TaxApportionment Act (UETAA). The UETAA’s approach to this issue is more administratively convenient and thus represents a more sensible approach. Because the UETAA has not been adopted widely, we offer a simple form of agreement that can be adapted for use by any donor who wishes to change the statutory default rules about the payment of additional estate tax liabilities.

Family Limited Partnership Case Analyzed

Prof. Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Jorgensen: A Familiar FLP Story, Tax Notes, 2009. 

Here is the abstract of the article:

Jorgensen provides a common FLP story with a familiar conclusion. Under section 2036, the estate did not receive those coveted FLP discounts and paid taxes on the full value of the assets transferred to their FLPs. The court presents a careful, logical, and well-reasoned decision that .should provide guidance in the FLP area to taxpayers

Farms and the Federal Estate Tax

Don Hurst (USDA, Economic Research Service) has recently posted on SSRN his article entitled Federal Tax Policies and Farm Households, Economic Information Bulletin 54.

Here is the abstract of his article:

Significant changes in Federal individual income and estate tax policies have occurred over the last 10 years. Analysis suggests that changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, resulting in the lowest tax burden on farm income and investment in a decade. Similarly, an analysis of the changes to Federal estate tax policies suggests that increases in the value of property that can be transferred to the next generation free of the estate tax, combined with special provisions for farmers and other small businesses, have greatly reduced the number of farm estates subject to the tax and the amount owed. While nearly 10 percent of commercial farm estates could owe tax in 2009, only 1 to 2 percent of all farm estates are estimated to be subject to the Federal estate tax this year.

Article argues for Repeal of Estate Tax on Gifts Made with Strings Attached

Richard L. Dees (partner, McDermott, Will & Emery) has recently posted on SSRN his article entitled Time Traveling to Strangle Strangi (and Kill the Monster Again): Part 2. 

Here is the abstract of his article:

In Part 2 of this article, the author argues that the solution to the problems of the Strangi cases detailed in Part 1 (see Tax Notes, Aug. 13, 2007, p. 563) is repeal of section 2036 and the other estate tax sections that include in the estate gifts made with retained 'strings'. The author proposes that repeal of these estate tax provisions will end for all time the problematic application of section 2036 to partnership and corporate interests. The author proposes coupling repeal with a change treating most irrevocable transfers with 'strings' attached as complete for gift tax purposes. The author believes that the opportunity to establish flexible succession plans without running afoul of section 2036 will encourage business owners, particularly small business owners, to make gifts implementing those plans. Thus the author's change is likely to produce gift tax revenue to help offset other reductions in the estate tax. The author also considers some of the technical issues in implementing his proposed tax changes.

Book Review: Estate Taxation

Ronald H. Jensen (Professor of Law, Pace University) has recently posted on SSRN a Review of Federal Income Taxation of Estates and Beneficiaries, 20 Buff. L. Rev. (forthcoming).

Here is the abstract of the review:

Review of Federal Income Taxation of Estates and Beneficiaries by M. Carr Ferguson, James L. Freeland, and Richard B. Stephens. This comprehensive volume should help fill a void which tax practitioners have long endured. As the authors properly point out, though many volumes have been written on estate taxation and estate planning, relatively little attention has been given to the income tax consequences resulting from death. The present volume is a welcome and needed addition to the sparse body of literature on this subject.

The right of publicity and Michael Jackson's Estate

 The following discussion is reproduced with permission from Bridget Crawford, Estate Tax Disaster Looms for Michael Jackson’s Estate, Feminist Law Professors, June 27, 2009:

The right of publicity is descendible in California.  This means that a person may transfer by will the right to exploit his or her name, likeness, image, etc., just as one might transfer, say, an heirloom piece of jewelry.

In Postmortem Rights of Publicity: The Federal Estate Tax Consequences of New State-Law Property Rights, published in the Yale Pocket Part,  I have argued, together with Mitchell Gans and Jonathan Blattmachr, that a descendible right of publicity likely is included in a decedent’s gross estate for federal estate tax purposes. In the Jackson estate, the estate tax value of Mr. Jackson’s rights of publicity very easily could exceed his estate’s liquid assets available to pay taxes.

In short: big estate tax problems loom on the horizon for Mr. Jackson’s estate.

The Legal Responsibilities of Owning More Than One Home

A recent Financial Times article has this warning for those who own multiple homes in different states:

The worst-case scenario occurs when you divide your time casually among your various homes. In a landmark, decades-old case still cited by attorneys, a Campbell Soup heir with homes in three states had his estate taxed in all three because he had failed to establish his intent to become a permanent resident of any one state. That case went to the US Supreme Court, where the heir lost.

The Moral: Take steps to establish your desired legal domicile if you own more than one home.

See Grace Weinstein, Homes across states can open door to taxman, Fin. Times, Jan. 27, 2009.

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

Future of Inheritance Tax in UK Unfavorable to Heirs

A promise made by the Tories, the flagship conservative party in the UK, that would triple the inheritance tax threshold may be postponed for sunnier financial times.  A business secretary for the party said the change is now an aspiration, not a priority.  

Additionally, a recent projection on what will be included in the budget does not mention a change in the inheritance tax threshold. 

See Andrew Porter, Tories will postpone flagship inheritance tax plan, says Ken Clarke, Telegraph, March 22, 2009; Budget 2009 - what to expect, Telegraph, April 21, 2209. 

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

Establishing a Tax-Friendly Domicile

A recent NY Times article discusses abandoning an old domicile and establishing a new one.  The author writes:

 Lawyers often advise their clients not to migrate or stay put solely for tax reasons, but all other things being equal, you might make your domicile — legal lingo for the place you call home — in a more financially friendly state. Once you have decided where you want to live, you need to sever contacts with the old state and establish ties that bind you to the new one."  

Deborah L. Jacobs, Wherever You Go, the Taxman Goes, NY Times, April 1, 2009.

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

Inheritance Tax -- A comparative analysis

Ann Mumford (Senior Lecturer in Tax, Queen Mary School of Law) has recently posted on SSRN her article entitled From Dahomey, to London, to DC: 'Marketing' Wealth with the Proposal for a Comprehensive Inheritance Tax.

Here is a summary of her article:

This paper was presented at the September 19, 2008 NYU Tax Law Review Symposium addressing Prof. Lily Batchelder's proposal to implement a comprehensive inheritance tax. This draft essay seeks to demonstrate that the comprehensive inheritance tax proposal involves a just tax. The idea of justice in taxation frequently involves linking benefits to taxation, and is explored in different ways in tax legal scholarship. On the question of inheritance taxation, however, justice is frequently determined within a socio-political mire of competing objectives. Given the political capital involved, it can be difficult to construct arguments effectively, especially if one is arguing for the adaptation of a different form of taxation of inherited wealth.

This paper acknowledges that the comprehensive inheritance tax will face the problem of politics, as the issue of inheritance taxation is intensely political, and its unpopularity has been the subject of valuable academic analysis. Its spectre of repeal in the US has had an enormous impact in the UK, and elsewhere. Thus this draft response to the proposal for a comprehensive inheritance tax has started from a point of acknowledgment of comparative impact.

Economic Crisis May Affect Self-Paying Life Insurance Policies

Some life insurance policies, especially those created in the 1980's and 1990's, may not be able to self-pay premiums as expected.  This is due to the high return that was anticipated when they were created and the unexpected trouble in today's market.  While plans vary, the lower interest rates could mean that a policy owner has to pay out of pocket or pay premiums for a longer duration.

People who use these policies as an estate planning tool, which is often done to specifically provide funds that will pay estate taxes upon death, should check on the health of their policies.

See Arden Dale, Keep Tabs on Insurance that Covers Estate Tax, Wall St. J., May 26, 2009.

Special thanks to Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this article to my attention.

Delaware RAP Tax-Traps

James P. Spica (Attorney, Honigan Miller Schwartz and Cohn Miller LLP) has recently published an article entitled A Trap for the Weary: Delaware's Anti-Delaware-Tax-Trap Statute is Too Clever by Half (of Infinity), 43 Real Prop. Tr. & Est. L.J. 673 (2009).

Here is a summary of his article:

Any state that repeals its rule against perpetuities (RAP) has to reckon with two federal tax terrors: the Treasury's effective date regulations for application of the generation skipping transfer (GST) tax and the so-called Delaware tax trap. Delaware addressed the latter terror belatedly, enacting its statutory anti-Delaware-tax-trap provision, title 25 section 504 of the Delaware Code, in July of 2000, five years after repealing the state's RAP with respect to personal property held in trust. This Article argues that, with respect to personal property held in trust, section 504 is otiose: the section completely fails to disarm the Delaware tax trap for want of a finite perpetuities testing period. To make that argument, this Article examines in detail not only the Delaware tax trap but also the situation in which a state, like Delaware, antecedently lacks a rule against suspension of absolute ownership or the power of alienation and eschews to invent such a rule pursuant to RAP repeal. For that reason, this Article will compare Delaware's post-RAP-repeal, anti-Delaware-tax-trap provision, section 504, with the post-RAP-repeal, anti-Delaware-tax-trap provision Michigan recently adopted. But first, this Article examines the “trap.”

Estate Taxes in 2010

Under the Bush tax cuts of 2001, the estate tax was supposed to fully disappear for the year 2010 and resume in 2011.  Instead, President Obama is assuming that the 2009 tax levels will carry over for 2010. There are two sides, however, to the question about whether the estate-tax plan for 2010 should be changed.

• In opposition of change: Some members of congress, who may be motivated by self-interest and/or ideology, and the very small number of Americans who will potentially be harmed by the higher-than-expected tax rate.

• In favor of change: Those who feel the estate tax is a necessary source of revenue for a highly indebted nation and those who believe the super-rich, at the center of high-salary and big-bonus scandals, are to blame for the current financial crisis.

See David R. Francis, Tax the heirs of the rich (at least a few of them), The Christian Science Monitor, April 22, 2009.

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

Interested Witness Without Knowing It

On April 27, 2009, a New York court held that a necessary witness to a will was an interested witness and was denied benefit under the will, even though his benefit under the will was unknown.

The respondent in the case, Henry Wu, was the beneficiary of two life insurance policies.  Decedent's will provided that all taxes resulting from decedent's death, including those arising outside the will, were to be paid by the estate and were not to be apportioned among the beneficiaries.  Wu argued that this provision freed him from responsibility for the taxes on the approximately $3.3 million he received from the life insurance policies.  The court would have agreed had Wu not been a necessary witness to the will.  New York law provides that a witness to a will cannot benefit from a disposition in the will.  The court reasoned that the non-apportionment clause operated as a benefit in favor of Wu because he would be relieved from his portion of applicable taxes.  Therefore, the court ordered Wu to pay his portion of the taxes on the life insurance proceeds.

The court recognized that the decision may seem harsh.  While the interested-witness statute was designed to prevent a witness from using fraud or coercion to benefit under the will, Wu was not named in the will, and he claimed that he was unaware of his benefit at the time of witnessing.  Nevertheless, the court deemed Wu an interested witness, even though it seems it was unlikely he used fraud or coercion to benefit under the will.  The court concluded that "[i]t behooves any drafter using [a non-apportionment clause] to be fully informed of the testator's non-probate assets to avoid unintended consequences, some of which may have even greater potential for frustrating the testator's intent."  In re Estate of Wu, 2009 NY Slip Op 29188 (Sur Ct, New York County 2009).

Taxation of Pet Trusts

Gerry W. Beyer (Governor Preston E. Smith Regents Professor of Law, Texas Tech University School of Law) and Jonathan P. Wilkerson (attorney and former Editor-in-Chief of the Texas Tech Law Review) have recently published their article entitled Max's Taxes: A Tax-Based Analysis of Pet Trusts, 43 Univ. Richmond L. Rev. 1219 (2009).

Here is a summary of their article:

Humans and charities are no longer the primary entities many individuals wish to benefit upon death. Instead, there is a growing interest in providing for Rover, Fluffy, and Polly, that is, our beloved pets. There has been a recent surge of public interest in pet planning as high-profile individuals have died with significant provisions in their wills or trusts for the benefit of their animals.

This increase in the special estate planning needs of pet owners is reflected by legal scholarship, continuing legal education programs, and legislative action in the pet trust arena. But little time has been devoted to the tax ramifications of pet trusts although a brief discussions are included in several articles. The purpose of this article is to fill this gap and give practitioners guidance as to how pet trusts are treated for tax purposes and to suggest to Congress how the Internal Revenue Code should be amended to clarify taxation issues.

The article may be downloaded here and a limited number of complementary reprints of this article are available upon request.

Estate tax proposals may still leave planning options available

The following excerpts are from Martin Vaughn, Estate-Tax Strategies Could Survive Curbs, Wall St. J., May 13, 2009:

The White House is proposing to curtail two popular tax-planning techniques, but wealth advisers say the strategies will remain attractive even if the new curbs are enacted. * * *

The administration has proposed to set a minimum term of 10 years for GRATs, which might make wealthy estate owners considering such a trust weigh the risk that they won't survive the 10-year term.

But that change would be far more palatable to the wealthy than limits on the amount of return that can be passed on to beneficiaries tax-free, according to Justin Ransome, a partner in accounting firm Grant Thornton's national tax office.

"This doesn't take the GRAT off the planning table for our higher net-worth individuals," Mr. Ransome says. "Even if they don't outlive the 10-year term, it's no skin off their nose," he said.

The restriction, however, might encourage estate owners older than 75 -- who would face a greater risk of dying during the 10-year trust period -- to consider other planning techniques, Mr. Ransome says.

A second Obama proposal aims to limit the ability of wealthy families to use partnership structures to minimize the valuation of assets for estate-tax purposes. * * *

But Greg Rosica, a tax partner at Ernst & Young, says the Obama proposal might be an overreach.

"If I've got a $5,000 asset that is subject to certain restrictions, and I don't have a lot of say in decisions about that asset, you're not going to pay me $5,000 for it, because I can't convert it to cash," he says. "Depending upon the circumstances, this could disregard some real restrictions that have an impact on the value of the asset."

Special thanks to Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this article to my attention.

How to value unpaid lottery entitlements in a winner's estate

Prof. Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Negron: Circuits Now Split 2-2.

Here is the abstract and conclusion of her article:

The article discusses Negron and the circuit split on the issue of whether to value non-assignable lottery payments in a decedent's estate by means of the actuarial tables or whether that value needs to be discounted for non-marketability.

When section 7520 requires use of the actuarial tables to value certain interests, like an annuity, the tables provide a substitute for a facts and circumstances determination. The tables offer the benefits of simplicity and ease, but not accuracy or equivalence to FMV, in any particular case. Therefore, facts that merely individualize valuation rather than undermine the factors integral to the tables’ assumptions are ignored.

With Negron, the circuits are evenly split, but the Fifth and Sixth circuits have the better argument. When section 7520 mandates the use of the actuarial tables, it is inappropriate to discount that value for nonmarketability. Moreover, calculating the value of a sure thing like state lottery payments, marketable or not, solely by the actuarial tables can not create a value that is wildly unrealistic and unreasonable in light of the regulations and the prior case law on which those regulations are based.