a client executes an estate plan with my law firm, I send a close-out
letter to the client describing what steps should be taken with
their executed estate plan, be it a will or trust or other legal
document. Not every lawyer takes time to explain to their clients
what to do with an important legal document and, from time-to-time,
people will ask me what they should do with their will. Like any
good lawyer, my response will be, “it depends.”
What individuals do with their estate planning documents usually
splits into two groups. The first group will take their estate plan,
stick it in a drawer somewhere in the house and forget about it.
Nine times out of ten, the estate plan will still be in the same
envelope the lawyer gave the clients when it is dug out by the personal
representative for probate. The second group will go to the bank
and plunk their estate plan into their safety deposit box. There
are problems with each method.
For the people that execute a plan and file in the back of the
draw underneath a calendar from 2001, the problem is pretty easy
to spot. The person that executed the will and stuck it in the drawer
or back of a closet could be the only person that knew where the
document is located. That person has now passed away. So who knows
where the plan is now? The heirs are left to ransack the house looking
for the plan in hopes of avoiding intestacy. There are other issues.
The biggest issue being that the document could be destroyed in
some fashion via fire, flood or other catastrophe. Another concern
is the possibility that the document could be thrown away by someone
cleaning out the drawer and not knowing the importance of the document.
I could go on and on about the different ways estate plans simply
Most people will think that placing their estate plan in a safety
deposit box would be full proof…not exactly. The main issue
with placing the plan in a safety deposit box involves the ability
of non-lessee to gain access to the safety deposit box after the
death of a lessee. Many states have some type of code provision
that provides guidance to banks on providing access at the death
of a lessee of the safety deposit box. Other states have complete
prohibition on non-lessee’s opening a safety deposit box.
The concern is when the lessee of a safety deposit box dies. Many
banks, even in states that allow access, simply refuse to open the
safety deposit box, even to another co-lessee, without a court order.
It is a simple matter of liability for the bank. Banks would rather
have the “protection” of a court ordering the bank to
open up the safety deposit box then opening it to the wrong person
and getting sued. Many states that allow access absolve banks of
liability for providing inappropriate access to the box in order
to promote accessibility. Thus, one must be aware of an individual
bank’s safety deposit access policy.
However, that leads to the question of who has standing to go to
court and get the necessary order to open the safety deposit box.
Normally, it would be the personal representative, but without the
will, that person does not exist, yet. It could also be the surviving
spouse. In fact, many states have provisions that dictate the procedures
to the bank, heirs and courts for this situation. However, it usually
requires someone with the right connection to the decedent going
to the register of wills or probate court with the correct paper
work and getting the order. The appropriate legal authority will
issue an order stating that the safety deposit account can be accessed,
but only for the limited purpose of looking for a will or other
Generally, access is eventually granted, but it takes time to gain
access to the safety deposit box. In the time it takes to get a
court order, the estate’s property could be wasting away for
the lack of administration. Imagine the inability for the future
personal representative to sell a decedent’s stocks in the
stock market collapse of 2008. Further, compounding the time problem
is the fact that many people keep their funeral/burial instructions
with their last will and testament. If those instructions are kept
in a safety deposit box, it is doubtful someone will go looking
for them in the safety deposit box. The natural inclination is for
people to look for the will after the funeral. Thus, a decedent’s
last wishes on burial might not be followed.
I recommend several steps to my clients in dealing with where to
store their estate plan documents. My first recommendation is to
place estate planning documents in a tamper and fire proof safe
in your home with your other important documents. Another possibility
is to have the attorney that drafted your estate plan keep the originals.
As a practical matter I do not keep originals in my practice. I
do keep copies. I recommend that an individual not store an original
will in a safety deposit box, especially in states that have complete
denial of access upon the death of a lessee. But, having a copy
stored there would be a good idea and a note describing where the
original will can be found would be an added benefit. A person might
also send a copy of the will or trust to the future personal representative/trustee
and inform that person where the original is being kept. I also
recommend for any copies of a will that a person makes to put the
name, address and phone number of the attorney that drafted the
will so survivors will know how to contact the attorney.
The most important thing to remember is that, wherever someone
decides to keep their will or estate plan, that person should make
sure to tell loved ones where that document is being kept to limit
the upheaval of house and home.
It is now August 2010. I am not shocked
to see that Congress has made no real movement on reforming the
2011 provisions of Economic Growth and Tax Relief Reconciliation
Act of 2001 (“EGTRRA”). As I detailed in prior newsletters,
there is no federal estate tax in 2010, but in 2011, the federal
estate tax will revert to 2001 levels. In 2011, any estates valued
over $1 million will be taxed at a fifty-five (55) percent tax rate.
Even if Congress does take action, I can guarantee that there will
be some form of federal estate tax, the only question is what the
federal exemption will be on a taxable estate.
Many people believe that the federal estate tax is applied to every
asset an individual owns at death, after the exemption, and on certain
other transfers considered to be the equivalent of transfers at
death. However, they are confusing two terms of art – the
“taxable” estate and the “gross” estate.
A taxable estate is calculated by taking the value of the total
property transferred or considered transferred at death, otherwise
known as the gross estate, and then reducing by various deductions,
exclusions and expenses. Then the federal estate tax rate is applied
to the value of the taxable estate over the federal estate tax exemption
to obtain an estate’s federal estate tax liability. Determining
the taxable estate is the real issue.
An individual’s gross estate is comprised of a number of
different assets but can be summed up as the value of the total
property transferred or considered transferred at death. Most estates
have the basic types of assets including real property, bank accounts,
investment accounts, stocks and bonds held in certificate form,
U.S. savings bonds, personal effects (like clothes, furniture, etc),
automobiles, boats, retirement accounts, annuities and potentially
life insurance policies. An estate could also include more sophisticated
assets including monies owed to decedents like a personal loan the
decedent made, unpaid wages earned by the decedent prior to death,
closely held business interests, certain transfers made within three
(3) years of death, transfers made effective at death, retained
life estate interests owned by the decedent, certain revocable transfers,
qualified terminable interest property for which the marital deduction
was previously allowed, certain trust assets where the decedent
is a beneficiary and has a general power of appointment, and taxable
gifts made over the annual federal gift exclusions.
From this list, several exclusions are applied. Any property created
and owned by spouses jointly is controlled by “the spouses’
joint property rule” and it provides that only half the value
of the property is included in the estate of the first spouse to
die regardless of which spouse furnished the means to purchase the
property. If the joint ownership was created by one or more of the
co-owners that were not spouses, the entire value of the property
is included. If the personal representative can document the consideration
the surviving co-owner(s) provided for the property, that value
is excluded from the decedent’s estate.
Life insurance also would be included in the gross estate if the
policy proceeds are payable directly or indirectly to the decedent’s
estate or the decedent held any incidents of ownership in the policy.
Incidents of ownership of a life insurance policy may include the
right to change the beneficiary, transfer ownership of the policy,
use the policy value as collateral for a loan, or any other traditional
rights of ownership.
After the exclusions, the personal representative would apply several
deductions. The deductions are broken down into ordinary and special
deductions. Ordinary deductions would be those deductions that accrue
during the administration of the estate and may include funeral
expenses, expenses arising from the administration of the estate
like attorney’s or accountant’s fees, and any claims
against the estate filed by creditors, like a payment on a credit
The special deductions may include the charitable deduction and/or
the marital deduction. The charitable deduction is comprised of
transfers including direct gifts and property set aside in the creation
of charitable remainder trust or charitable lead trust. The marital
deduction is transfers at death between spouses. The marital deduction
is an unlimited deduction. That means a decedent can transfer an
unlimited amount of assets to the surviving spouse and not be taxed
on that transfer. Don’t worry, Uncle Sam eventually gets his
cut as those assets are taxed on the surviving spouse’s death.
At this point, an individual’s taxable estate is calculated.
However, the federal estate tax exemption is reduced by any post-1976
inter vivos gifts made in excess of the “annual exclusion”
amount ($13,000 in 2010) and also was not included in the gross
estate as a special lifetime transfer. An estate has a $1 million
lifetime exemption that gets consumed as an individual gives gifts
away above the annual exclusion.
From this final calculation, a person’s taxable estate is
determined, and the tax rate is applied to determine an estate federal
estate tax liability.
As an example of how this could impact a person living in the DC
metro area, let’s calculate the federal estate tax liability
for a simple estate.
- The Facts: Person X is single, owns outright
a single family home in Arlington, Virginia priced with an approximate
value of $1.1 million - on the higher end but not too extreme
for a single family home in North Arlington. Person X was a white
collar professional and has $500,000 combined in savings and retirement
accounts when Person X died. Let's also say Person X demonstrated
incidents of ownership on a life insurance policy worth $500,000
by having the proceeds being payable to Person X's estate. Let's
say the allowable debts, expenses and deductions are $100,000,
and that Person X did not exceed the lifetime taxable gift exemption.
Let's also say Person X dies on January 1, 2011 with a will. Further,
Congress has made no changes to EGTRRA and the 2011 federal estate
tax laws apply, since that is the law of the land, barring any
- The Math: Person X’s gross estate will
be valued at $2.1 million (the home, the savings/retirement accounts
and the life insurance policy). The gross estate is reduced by
$100,000 from the allowable debts and expenses, leaving a taxable
estate valued at $2.0 million. The 2011 federal estate tax exemption
of $1 million is applied to the taxable estate, leaving $1.0 million
to be taxed at the fifty-five (55) percent tax rate.
- The Tax Liability: That means Person X’s
estate has a federal estate tax liability of $550,000 ($1.0 million
times fifty-five percent) that needs to be paid. How Person X’s
will is drafted will determine who pays or what property is used
to pay the estate taxes. There are a number of ways the tax liability
could be satisfied including using up all the money from the life
insurance policy and dipping into the bank accounts, or the reverse,
or selling the house, or a combination of ways.
As it can be seen, being able to compute an individual’s
taxable estate from their gross estate will determine whether an
estate will owe federal estate tax. Further, even a rather simple
estate, for an individual living in a high priced real estate market,
can easily pass over the 2011 federal estate tax exemptions if no
changes are made by Congress. Next month, I will go into the current
proposals in Congress on federal estate tax reform and what I think
the prospects are for each.
May, I described the potential claims being made against the estate
of noted plaintiff's attorney John O'Quinn in "Even Lawyers Get
It Wrong: John O'Quinn." (See
May 2010 Newsletter - Estate of the Month) One of those claims
could be made by his long-term partner, and potential common law
wife, Darla Lexington. At the time of O'Quinn's death in October
2009, Lexington stated she wanted the matter to go as smoothly as
possible. Unfortunately, that is not going to happen as the personal
representative and Lexington could not settle on any type of agreement
and litigation ensued.
Now, Lexington’s attorney has turned up the heat. Lexington’s
attorney claims that Lexington was in a common law marriage with
O’Quinn and entitled to fifty (50) percent of O’Quinn’s
estate as community property. On August 6th, in what will likely
be years of litigation over the estate, a Texas judge heard arguments
over whether O’Quinn’s personal representative will
be able to sell several antique automobiles to pay off estate debts.
Lexington claims O’Quinn gave those cars to her as gifts,
but attorneys for O’Quinn’s estate said her name does
not appear on the titles for any of the vehicles. Because of the
ambiguity of O’Quinn’s relationship with Lexington,
the court will now decide when those automobiles will be sold.
As I mentioned in May, O’Quinn’s failure to look at
the big picture could lead to issues down the road including claims
from Lexington that could drain the assets of the estate. It looks
like the first step down that road began in August 6th.
to the Small Business Administration, approximately ninety percent
of all U.S.-based businesses are either family owned or controlled
through some type of family ownership structure. Some of the most
successful, or most valuable businesses, are professional sports
franchises owned by a family or controlled by one family. For example,
my favorite team, the Pittsburgh Steelers, have been owned/controlled
by the Rooney family since 1933, when Art Rooney paid $2,500 in
franchise fees to the NFL. That initial investment has skyrocketed
to a current value of $1.02 billion according to Forbes Magazine.
However, these families have many of the same estate planning issues
that small family owned businesses have. The disappearance of the
federal estate tax in 2010 provides an interesting teaching point
in how powerful the federal estate tax can be on a family business.
Georgia Frontiere died in November 2008. George Steinbrenner died
in July 2010. In addition to having similar first names and owning
professional sports franchises, Frontiere owning the St Louis Football
Rams and Steinbrenner owning the New York Yankees not much is different
about their estates. However, Frontiere’s heirs are in the
process of selling their inheritance, the Rams, while Steinbrenner’s
heirs will not have to sell the Yankees. A short span of 18 months
is the difference between one family being able to retain ownership
of the family business and another being forced to sell it to pay
Georgia Frontiere inherited ownership of the Rams in 1979 after
the death of her husband, Carroll Rosenbloom1.
Two months after Rosenbloom's death, Georgia married Dominic Frontiere
and became Georgia Frontiere. They divorced in 1988. In 2008, the
Rams were valued at $929 million by Forbes making Frontiere’s
sixty percent share worth $557 million dollars. Her applicable federal
estate tax, excluding the value of the rest of her estate, potential
state estate taxes and administration expenses, would result in
a tax payment of approximately $250 million dollars2. Frontiere’s
heirs, her son and daughter, are forced to sell the Rams because
of this estate tax liability.
In comparison, George Steinbrenner’s death in 2010 will not
result in any type of forced sale. Steinbrenner was the lead investor
in an ownership group that purchased the Yankees for approximately
$10 million from CBS in 1973. At his death, his estate was estimated
at $1.1 billion with most of it going into trust for his wife. Steinbrenner’s
will creatively gave his lawyer the power to decide whether that
trust pays federal estate tax for this year, or not until after
Joan Steinbrenner dies. There is no federal estate tax in 2010,
meaning a tax liability of zero. Comparing that to 2009 or 2011,
when there is a federal estate tax, would have resulted in a tax
liability of $495 million or $605 million, respectively. Steinbrenner’s
heirs are also saved from the 2010 capital gains tax provisions
because the elimination of the stepped up basis condition for 2011
would only arise if Steinbrenner’s heirs sold the team, triggering
a taxable event. No sale, no capital gains tax owed.
Even though there is talk of making the estate tax retroactive
for 2010, to put it simply, Steinbrenner’s death in 2010 saved
his family from selling the Yankees. If Steinbrenner had died in
2011, given the size of the potential tax liability of half a billion
dollars, I doubt that Steinbrenner’s estate would have been
able to come up with the money to pay the federal estate tax liability
without selling the team. I do not know of too many people with
a spare $500 million lying around. Essentially, because Frontiere
and Steinbrenner died in different years and, thus, under different
federal estate tax regimes, Frontiere’s federal estate tax
liability is forcing the sale of the Rams while Steinbrenner’s
heirs will likely retain ownership of the Yankees. Sounds a little
unfair, but, that is the way it goes.
What can the average person running a family business learn from
this? Make sure the main family business owner dies in 2010 so that
the business can still remain inside the family? Without breaking
a law or two such a convenient outcome is not too likely. In reality,
the best lesson is to take an analytical view of the entire estate
and determine how the estate meshes with the family business and
take action accordingly. Though there are no guarantees the family
business will not have to be sold, there are a variety of methods
that can be taken to minimize tax liability, reducing the need for
a sale. I will get into those methods in future newsletters.
1 Rosenbloom originally was part of a
five-man ownership group that purchased the defunct Dallas Texans
and moved the organization to Baltimore to become the Baltimore
Colts. In 1971-72, Rosenbloom was part of a historic franchise swap
and acquired the Los Angeles Rams from Robert Irsay who received
the Baltimore Colts. In 1995, Frontiere moved the Rams to St Louis.
2The Federal Estate Tax would be calculated
by taking the value of the Frontiere’s share of the Rams,
the $557 million, subtracting out the $2 million federal estate
exemption for 2008 and multiplying that number by the 2008 estate
tax rate of 45%.
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