I Have a Will...What's Next?

Once 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 “vanish.”

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 testamentary instruments.

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.

Basics of Estate Planning: Determining if Your Estate Will be Hit by the 2011 Federal Estate Tax

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 card.

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 changes.
• 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.

Update Estate of the Month: John O'Quinn

Back in 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.

Estate of the Month: George Steinbrenner v. Georgia Frontiere

According 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 estate taxes.

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%.