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Earlier this week the business section of The New York Times ran a great article about a recently deceased Texas billionaire, Dan L. Duncan. According to Forbes Magazine, Mr. Duncan’s net worth was about $9 Billion, making him the 74th richest person in the world. Not bad for a guy who started his business with $10,000 and two propane trucks.
Mr. Duncan died earlier this year creating a good news/bad news tax “situation” for his family. The New York Times did a wonderful job of highlighting the good news; however, they completely missed the boat on the devastating bad news.
The good news was really (really, really) good. Because Mr. Duncan died in the 2010 tax year, his $9,000,000,000 estate escaped a 45% estate tax. Mr. Duncan’s fortuitous death saved his family at least $4,050,000,000 (wow that’s a lot of zeros). Due to a lapse in the estate tax this year, Mr. Duncan’s estate received “uber-favorable” tax treatment (or no tax treatment at all). That’s the good news and that’s what The Times focused on, and who could blames them- they were probably blinded by all of those zero’s.
2010’s estate tax anomaly will surely be fixed soon. Many practitioners believe that next year the estate tax exemption will settle at $1,000,000, putting everyday families at the risk of having to fork over nearly half of the amount over a million to the federal government.
Mr. Duncan’s estate saved $4.5 billion, this year- that’s good. Mr. Duncan passed a large chunk of his estate to his wife via a Will, that’s bad. A Will…that’s right, no sophisticated estate/tax planning for this billionaire-his estate got lucky, but I’ve got a feeling there will come a time when the luck will run out.
So where is the dark lining in this silver cloud? The dark lining, in this case, is how Mr. Duncan passed these assets to his wife- a Will. Most likely, at this point, she owns the assets outright and free of trust. Now for the bad news: When Mrs. Duncan dies, there surely will be an estate tax and all those assets that she now owns will be taxed. Uncle Sam is patient- he can wait a few years, especially when the tax treatment of these assets will be more favorable to him. If Mr. Duncan had planned better and utilized even a simple revocable living trust, it is quite possible that these assets would NEVER be taxed by the estate tax.
The New York Times only highlighted the good news: Huge tax savings in 2010, not the bad news: A multi-billion dollar estate tax time bomb set to go off once Mrs. Duncan dies. Many would argue that there are billions of reasons for Mrs. Duncan to die this year. Be careful Mrs. D.
Tuesday is always an interesting day in “Guertin Land.” Tuesday is my work at home day. One day a week I play lawyer and daddy from home. My wife is off to her weekly meeting and its just me, my son, the dogs and client files. Now I try to make this as legit a work day as possible- this means attempting to get up, awake and working long before my 20 month old wants to start his day ( which sometimes happens at 5 a.m)- just last week at around 5:12 AM Jeremy was belting out at an extreme volume “Allllllll Aboard!” He hasn’t been the same since he took a ride on the Essex Steam Train. So I parent and work my way through the day. This morning I was working on a trust and I wrote this paragraph, that when I re-read I could not help think that if I get hit by a bus tomorrow and die- nobody,I mean NOBODY will know what the heck I was trying to say. So, try to get into my mind- read what I wrote and post a comment with what you think I meant- the person closest will get a copy of my book and something random from my office.
The term “Equally” when used in this agreement means that if one of the grantor’s issue receives any property because of the grantor’s death (including property not passing through the grantor’s estate such as real property, life insurance, joint bank accounts, investment accounts and all other non-probate assets), which when added to the property passing by way of this trust equate to a greater total fair market value (at the time of the second death of me and my spouse) than the grantor’s other issue would receive. The Grantor’s issue receiving the greater total amount, considering all of the above, shall be required to pay to the issue receiving the lesser amount, an amount necessary to equalize the total amounts necessary to effectuate a 50/50 total distribution to both of the grantor’s issue, per stirpes. If either or both of the grantor’s issue has made a contribution to any property increasing the fair market value (exceeding $1,000), that amount will be subtracted from the fair market value before the above calculation.
We’re going to hit up the “way back machine” this week. I’m going to take you back…way back. Way back to a post I wrote in February of 2009 (okay- maybe we’re not going that far back). Why you ask- well because I am currently writing a post on what happens if you die with a Will, and I thought that this would be a nice primer- showing what happens if you die without one. So here goes..get ready to flashback… are you feeling tingly?
If a person dies without making a Will he/she dies intestate. Without a Will, a decedent’s property will pass according to the State of Connecticut Intestate Succession Laws. If you are thinking that “intestacy” sounds like some sort of sickness, you may not be too far off the mark. When you see how the state distributes the funds of those who die intestate… you may feel a little sick.
In Connecticut, State statutes provide that if a person dies intestate, and there are children that are the children of the decedent and the spouse, the surviving spouse will receive the first $100,000 plus one half of the balance of the intestate estate. The children will receive the remainder. For example, assume a $500,000 estate: The spouse will receive $300,000 ($100,000 plus half of the remaining $400,000) and the children will receive the remaining $200,000 in equal proportions ($100,000 each). Now let us suppose that there is only one child who is 18 years-old. Even a very mature 18 year-old may have difficulty handling a check for $200,000.
Typically, when most people plan out their estate, they want all of their assets to go to the surviving spouse and not to their children. The thought is that the surviving spouse is in the best position to use the assets wisely for the benefit of the children. In many scenarios it does not make sense to hand a large sum of cash over to a child or young adult. Imagine trying to convince an 18 year-old into investing his/her money in a college education — good luck.
The rules are different if the decedent had children that were not children of the surviving spouse. In this case, the surviving spouse would receive one-half of the intestate estate, and the children would receive the balance. This solution seems to be based in logic. The state wants to make sure that the step-children of the surviving spouse are not taken advantage of by a person who is not related to them by blood. While this plan works in preventing the aforementioned problem, it still puts money into the hands of people who may not be ready to handle it. With a Will based plan you can direct where your assets go, as well as direct appropriate measures to protect your children from the problems that come with receiving a large sum of money outright.
If there are no children of the decedent, but the decedent is survived by a parent or parents, the spouse does not receive the entire intestate estate. In this scenario the surviving spouse will receive the first $100,000 plus three-quarters of the balance, and the parents would receive the balance of the estate. Furthermore, if there are no heirs to the estate, the decedent’s money, property, etc., will escheat to the state and the state will become the owner. It’s probably not a coincidence that you cannot spell escheat without “c-h-e-a-t.”
As you can see from the above sampling from the Connecticut Intestate Succession Statutes, by not planning for the disposition of your property the state has a plan for you. It should be no surprise that control freaks hate the laws of intestacy. It takes control (albeit control that was never exercised) of a person’s hand and vests that control with the State, who then applies cookie cutter solutions for unique situations. The only way to avoid intestacy is to make sure that you have a validly executed Will. Any other plan will fall short.
You know your old friend Per Stirpes. You remember – from your Will…right there in Article Four. “My Executor shall distribute the remaining property to my descendants, per stirpes.”
At least once a week someone asks me about per stirpes. Let me see if I can explain it and not sound like a lawyer (no easy task). Okay, here goes- Whenever a distribution is to be made to a person’s descendants per stirpes, the distribution shall be divided into as many equal shares as there are then living children of such person and deceased children of such person who left then living descendants. Each then living child shall receive one equal share and the share of each deceased child shall be divided among such child’s then living descendants in the same manner.
How’s that for non-lawyer talk? Well, I may have fallen a little short of the mark- how about an example? George has two children: Marc and Heather. George dies and leaves his estate to both Marc and Heather, per stirpes. Marc has predeceased George but has two children, Ernie and Haley. Heather takes fifty percent (50%) of George’s estate. The other fifty percent (50%) is divided equally between Marc’s children Ernie and Haley. And that is per stirpes in a nutshell.
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