April 2012 Topics
Wills were being drafted as early as the Roman Empire. Trusts arose during the time of the Middle Ages as knights looked to protect their property when going off to the Holy Land during the Crusades. So, it is pretty easy to say there are not many "groundbreaking" estate planning legal disputes for the Supreme Court to decide.
But, on March 19, 2012 the Supreme Court heard arguments on whether children conceived after their father died are entitled to Social Security survivor benefits.
The facts of the case are pretty innocuous. Robert and Karen Capato's had twins born in 2003. The problem - the twins were born eighteen months after the death of Robert. Sometime in 1999, Robert was diagnosed with esophageal cancer. Because the couple feared that his treatments might leave him sterile, Robert began depositing sperm at a sperm bank in Florida. Apparently, the impact of his cancer treatment subsided and Karen gave birth to a naturally conceived son in 2001.
Unfortunately, his condition took a turn for the worse, and he passed away in March 2002. Prior to his passing, the couple desired that their son should have siblings. They made the decision to use in vitro fertilization ("IVF") with Robert's stored sperm.
On the estate planning side, the couple had a notarized statement executed stating that any children "born to us, who were conceived by the use of our embryos" shall in all aspects be their children and entitled to their property. However, Robert did not address this issue in his will.
So, eighteen months after Robert's passing, Karen gave birth to a set of twins. Karen applied for Social Security survivor benefits for all the children. The naturally conceived son was awarded benefits; the twins were not.
Since 1939, the Social Security Act has offered benefits to the survivors of a deceased wage earner, including dependent children. Not surprising, the 1939 law did not address children born through the use of technology developed 50 years in the future - IVF - allowing for a dead man to impregnate his surviving wife.
Thus, an administrative law judge ("ALJ") ruled based on a 1939 federal law that requires the Social Security Commission to look to the state laws of the benefit seeker (Karen Caputo) to determine whether the benefit seeker is eligible to inherit property. Under Florida law, the twins are not eligible.
An appeals court reversed the ALJ's decision based on another part of the 1939 law that defined an eligible child simply as "the child or legally adopted child of an individual." However, another provision in the law says a surviving child is one who is "dependent on the deceased wage earner at the time of death." Since the twins were not yet conceived, the Commission argued before the Supreme Court, the twins could not have been dependents at the time of Robert's death.
Other appeals courts have found just the opposite of the Capato's appellate court ruling and agree with the ALJ's findings. With several appeals courts having contradictory rulings, the matter was ripe for the Supreme Court to address the issue.
Typical to a Supreme Court argument, many of the Justices posed numerous hypotheticals to the sparring lawyers including:
Complicating this situation is the fact that IVF is a growing phenomenon. As the procedure's pricing has come down, more Americans have the means to go through this process. Further, based on the Supreme Court's ruling, U.S. servicemen that go overseas into a war zone that have used sperm banks before deploying to procreate later might not get the correct level of benefits for any serviceman's post-death conceived child.
- From Justice Sotomayor - "Let's assume Ms. Capato remarried but used her deceased husband's sperm to birth two children .?.?. Would they qualify for survivor benefits even though she is now remarried?"
- From Justice Sotomayor - "What happens if the decedent is the mother?"
- From Justice Sotomayor - "Does marriage matter only if it's the father?"
- From Justice Sotomayor - "What if you are a sperm donor? Does any offspring that sperm donor have qualify?"
- From Justice Roberts - "What if, the Capato twins were conceived four years after the death in this case? Would your argument be the same?"
- From Justice Ginsburg - would people in 1939 have "understood that the marriage ends when a parent dies?"
- From Justice Scalia - "What is at issue here is not whether children born through artificial insemination get benefits. It's whether children who are born after the father's death get benefits."
Needless to say, a legal system designed in the 18th century trying to interpret a law from the 20th century addressing technology created in the 21st century is struggling with the right answer. There is also the added weight of questions related to federal vs. state powers that has come up under Affordable Care Act, or Obamacare.
Justice Kagan summed up the issue confronting the legal and benefit community best by saying "It's a mess."
A decision will be out in a few months and I will keep you posted.
I draft numerous plans for couples that have started a family. Many times, the couple will execute their estate plan after the birth of their first child but plan on having additional children. Most clients in this position will ask how their estate plan will work if another child is born after they have executed and put their plan in place. Well, there is a simple legal doctrine for that called the "pretermitted" child or "omitted" child doctrine.
A pretermitted child is a child who is:
Many states have statues that permit a pretermitted child to receive, or demand, an inheritance under the will. Many states will allow the pretermitted child to claim an intestate share of the estate. Other states allow for the inheritance going to a pretermitted child to be an amount comparable to the distributions made in the will for children who were alive when the will was signed.
- Born or adopted after the parent's will is executed, and
- Who is not otherwise provided for by the parent.
The share carved out for the pretermitted child comes from the other heirs' share. The pretermitted child's share does not necessarily come from the share of other the children. The pretermitted share could come from the share going to other heirs. You can see how this might lead to litigation in large estates as heirs fight it out to protect their inheritance.
Another issue is that this doctrine only covers a person's probate estate. Beneficiary designations, if not correctly stated, could result in that pretermitted child not being able to receive distributions from a paid-on-death account.
Many estate planning attorneys, in the attempt to avoid litigation, will counsel clients to include a clause in their will affirming that any after born children will be included or not included in the testator's estate.
However, as I stated before, a testator can disinherit any heir, except for their spouse, and a pretermitted child is no different. All a testator needs to do is include a clause in the testator's will that states any heirs unknown at the time that will is executed, or any heirs not named in the will are disinherited.
A less than perfect example of this situation was the October 2010 Estate of Month of Michael Crichton. It is a little puzzling that the Court provided for the pretermitted child even though Crichton had a disinheritance clause in his will. The likely reasoning for the Court's ruling was that the pretermitted child was born a few months after Crichton's death, and he acknowledged the post-death born child would be his.
Now, you will ask yourself, how the pretermitted child doctrine meshes with the above Social Security issue the Supreme Court was trying to resolve. What the Supreme Court will resolve is whether a post-death conceived child is considered pretermitted for the purposes of receiving Federal Benefits. Not an easy issue to resolve. The Supreme Court's oral arguments give little clue how the Supreme Court will rule.
But, the Caputo case is a perfect demonstration that if you want your pretermitted children protected, it always makes sense to update your will to reflect any children born or adopted after the execution of your will.
Last month, I used Whitney Houston's estate to demonstrate the need to make final arrangements and ensure your fiduciaries are aware of those plans. But, her estate planning problems do not stop there. Her estate is an example of what not to do, especially, if you happen to have sold 170 million albums worldwide.
On March 7th, court records show that Houston's will was entered
into Fulton County Probate Court. Anyone can view her will.
Records show that her will was executed on February 3, 1993, while
still married to Bobby Brown and before her child, Bobbi Kristina,
was born. Houston executed a codicil (see page 17) on April 14,
2000, appointing Houston's mother, as personal representative, replacing
her attorney, Sheldon Platt. She also replaced several fiduciaries.
Her will created a testamentary trust that gave her entire estate to her daughter. A testamentary trust is a trust created by the will upon the death of the testator. Pursuant to the terms of the testamentary trust, the trust will last until Bobbi Kristina turns thirty (30) years old.
Let's start with the positives. At least Houston was thinking about the possibility of having minor children when she created her will. If she had no will or only gave her estate to her "issue" then her entire estate would be distributed to Bobbi Kristina for her to spend tomorrow since Bobbi Kristina is not a minor. At least there is someone with a level of fiduciary responsibility overseeing the trust while she is still young.
Unfortunately, the rest is all negative with respect to her estate planning.
Given her celebrity stature, there is absolutely no reason she
should have a will creating a testamentary trust. It is a ripe opportunity
for the Access Hollywood and TMZ's of the world to invade her loved
one's privacy and look at where all her assets are going. It will
allow anyone to see how much money Houston's probate estate is worth
and how much money will eventually transfer to her daughter. Walter
Kronkite's estate is another perfect example of this type of estate
She should have created a revocable living trust like Elizabeth Edwards. A revocable trust is a private document that only a few people can see. A trust would allow the press to merely speculate on what she is doing with her estate.
Further, given that is known for signing the most lucrative female recording contract at the time; her estate plan should have been more complex than a revocable living trust, much less a will. I counsel young couples with young children to create at least a will with a testamentary trust, but I might advise a multi-million dollar singer to do something different. Because of her simple plan, the estate tax implications alone could run into the millions of dollars for her estate. Houston might give Steve McNair's estate a run for its money in estate taxes paid.
She also never updated her will for life changing events. She divorced her husband, Bobby Brown in 2007, but she never updated her will. If she had died without any issue, her will stated that her assets would be split between her family and Bobby Brown. Her ex-husband would have received a portion of her estate. How do you think that would have gone over at the funeral? You can make the argument that the reason she did not update her plan erasing her ex-husband's interest was because her daughter was there to inherit. But, you never know. Some type of unusual event could have resulted in Bobby Brown inheriting Houston's estate.
Lastly, it appears that Houston had her entertainment attorney, Sheldon Platt, craft her estate plan. It looks like she did not go to an experienced estate planning attorney that would have individually contoured an estate plan to her needs. The simplicity of the plan, relative to the complexity of the estate, and the lack of updating demonstrates that Houston received poor estate planning legal counsel or someone not completely versed in estate planning.
Why would she not have good counsel? She was being cheap? She only wanted one attorney to handle everything? She did not want to be bothered? Her attorney wanted to maintain control over all the legal matters. There could be a hundred reasons.
I hope you can use her estate planning foibles, identified her and in last Month's Estates of the Month, as example of what not to do.
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