The Estate Plans of Michael Jackson and Steve McNair

All too often, celebrities and otherwise wealthy people create problems for their families by failing to take the opportunity to plan their estates. Anyone who fails to provide for their loved ones creates problems, but these problems become magnified for celebrities because of the publicity and wealth. Two recent very public deaths underscore the value of proper estate planning.

Although there will probably be litigation over Michael Jackson’s estate if for no reason other than its size, “The King of Pop” appears to have done all that he could to discourage such challenges. Michael’s will “pours” his assets into a trust. He probably did this to limit public access to his affairs since while one’s entire will is public information, the specific details of a trust are not. Michael’s will and trust specifically name his three children as his beneficiaries. His trust names certain of his siblings’ children as contingent beneficiaries. This is important for two reasons. First of all, there would be no incentive for someone else to claim they are a child of Michael Jackson. Secondly, it takes the intestacy laws of the State of California out of the picture.

Michael’s will attempts to limit the inevitable legal battle over his children by naming a guardian for the children (his Mother) and even a contingent guardian (Diana Ross). His will also contains language to the effect that he is intentionally omitting to provide for his former wife, Deborah Jean Rowe Jackson. These clauses can be important in any future litigation.

The heirs of former star quarterback Steve McNair will not be as fortunate as Michael Jackson’s heirs. McNair, killed in a recent murder-suicide apparently died without a will. NFL insiders are incredulous at this apparent oversight since pro football agents typically refer their clients to estate planning attorneys as a matter of course. If McNair died without a will, the state of his residence and not McNair will decide who gets his assets. The former All-Pro left a wife and their two minor sons. Reportedly, he had two other sons not with his wife One can expect a lengthy legal battle over the paternity of these children and the resulting disposition of the estate. If McNair left no will, he may also have failed to take advantage of some fairly simple estate tax saving opportunities, thus requiring his estate to pay the maximum amount of taxes.

No one should die without a will. The relative complexity of settling the estates of these two recently deceased celebrities will highlight the consequences of failing to do so

The Credit Shelter Trust

The Credit Shelter Trust, sometimes referred to as a “Bypass” or “AB” trust, is so important to any married person’s basic estate plan that it would be malpractice for any estate planner not to at least discuss this estate tax saving tool with his or her married clients. This trust, properly drafted and implemented, will insure that a spouse’s exemption from the federal estate tax will not be wasted.

By way of background, every U.S. citizen and most U.S. residents are granted a lifetime exemption from the federal estate tax. Although technically a credit, the amount of this credit exempts the first $3,500,000 of any one individual’s estate from taxation in 2009. Although future legislation is expected, the current law would exempt only $1,000,000 per person from taxation in 2011. In addition to one’s lifetime exemption,
gifts or inheritances to spouses are fully exempt from estate taxation.

A couple with a combined taxable estate of less than two times the applicable exemption ($7million in 2009, but $2million in 2011) would expect that their ultimate beneficiaries (usually their children) would pay no federal estate tax. Under current law though, this is not always the case. Assume Husband and Wife each have a taxable estate of $1million or a total of $2million. Husband dies in 2011 when the exemption is $1million. Husband leaves his entire estate to Wife and because of the unlimited marital deduction, no estate tax is due. Wife dies then with an estate of $2million. Since her estate has an exemption of only $1million, her beneficiaries are subject to a federal estate tax of approximately $500,000 ($1,000,000 taxable estate times 50% federal estate tax rate).

This happened because her husband wasted his exemption by leaving his entire estate to his wife. This could have been avoided by leaving an amount of his estate equal to the exemption to the couples’ ultimate beneficiaries, but for a lot of reasons this is not usually practical. The solution then is for the first spouse to die to leave the amount of the exemption to a credit shelter trust. The taxable estate of the second to die spouse then would not include this amount.

The language contained in a properly drafted Credit Shelter Trust is by necessity voluminous and complex. However, the trust is fairly simple to administer. In order to accomplish the goal of not wasting the first-to-die spouse’s exemption, the principal (generally up to the amount of the exemption) is left to the couple’s ultimate beneficiaries, for example the children. Typically they are not entitled to any of the principal until the second spouse passes away. The surviving spouse receives all of the income from the assets placed in this trust during his or her lifetime. The surviving spouse may also receive the greater of 5% of the assets or $5,000 each year. In addition, the trustee is usually granted the authority to make discretionary distributions of principal to the surviving spouse for his or her health, maintenance, support or education. The surviving spouse is almost always a co-trustee and under certain circumstances, the only trustee.

Practically, the spouse has almost complete access to the assets of the trust. Considering that it comes with a substantial tax benefit to the ultimate heirs, it does seem foolish not to employ this tax saving tool where appropriate.

The Irrevocable Life Insurance Trust

To most estate planners, basic estate planning would include a will, living trust (where applicable), credit shelter trust (if married), property power of attorney, medical power of attorney and living will. Reducing the federal estate tax beyond the credit shelter trust usually requires an irrevocable transfer of the ownership and use of assets to your loved ones .This strategy is generally appropriate only for the wealthy. The Irrevocable Life Insurance Trust (“ILIT”) though, has the potential to escape estate tax while retaining the ability to control the disposition of assets in the form of life insurance proceeds

Proceeds of life insurance policies owned or deemed owned by a deceased insured or payable to his or her estate can be subject to the federal estate tax depending on the size of the estate. You can avoid having the life insurance proceeds included in your taxable estate by naming someone else such as your spouse or children as the owner of the policy. For many people, this is not a practical solution. For example, this may not be in the best interests of your children if they are minors or otherwise not in a position to manage a large sum of money. Furthermore, the proceeds would be included in the beneficiary’s estate.

The ILIT may be an opportunity to have your cake and eat it too, in that you can provide who and under what circumstances receives the proceeds while escaping the federal estate tax on these proceeds. The trust and not the insured, spouse or heirs must own the policy, The insured must not have any of the powers of ownership such as the right to change the policy in any way. For new policies, the trustee is the original applicant and subsequent sole owner of the policy. The ownership of an existing policy can be transferred to the trust by completing an irrevocable assignment form provided by the insurance company designating the trust as the new owner and beneficiary of the policy. However, if the transferor insured dies within three years of the transfer of an existing policy (but not the purchase of a new policy), the proceeds will be taxable for estate tax purposes.

Like wills and other estate planning documents, sample ILITs can be obtained on the internet. It is highly recommended though to engage an attorney to draft an ILIT because certain legal issues may have to be addressed. For example, if an existing policy is transferred to an ILIT, the cash surrender value could be a taxable gift. A taxable gift can also occur to the extent the insured pays the premium for the insurance policy unless a “Crummey Power” is utilized.

In addition to these pitfalls, a well drafted trust can provide opportunities for the insured and his or her beneficiaries. For example, a “fail-safe” clause could provide protection from the estate tax should the insured die within three years of the transfer of an insurance policy to an ILIT. Also, it is customary to add a clause to the trust authorizing the trustee to either purchase assets from or lend money to the insured’s estate. This option provides the estate with liquidity while shielding the insurance proceeds from tax.

Any competent estate planning attorney can help you avoid the pitfalls and take advantage of the opportunities of an Irrevocable Life Insurance Trust.

Property Power of Attorney

Whether you use a will or a living trust no estate plan is complete without a property power of attorney. This is a legally binding document in which you give the authority to another person to make financial decisions for you. A property power of attorney is not to be confused with a medical power of attorney which gives another person to make medical decisions for you. This document will be the subject of a future discussion.

Why would you want or need a property power of attorney? If you become incapacitated to the extent you cannot handle your own financial affairs, you and your family will be glad you have designated someone of your choosing to do so. The alternative is a guardianship proceeding which is costly, time consuming and sometimes humiliating.

You may also want a power of attorney even if you are competent to handle your affairs simply for convenience. For example like most couples my wife and I have purchased, sold and refinanced several properties over the course of our marriage. With a properly drafted power, only one of us has had to attend the time consuming settlements necessary to accomplish these real estate transactions.

Powers of attorney are characterized several different ways. They can be general or specific. A general power of attorney grants your agent the authority to conduct all of your affairs. A specific power grants your agent the authority to act for you only in specific transactions, such as a real estate closing. Whether general or specific, powers can also be limited to a certain time, for example when you return from an overseas trip, or powers can be valid until you revoke it.

A durable power of attorney is designed to be effective before and after your incapacity. A springing power become effective only upon a determination (usually by one or even two doctors) that you are incapacitated to the extent you cannot handle your own affairs. In most cases you would want the power to be durable but not springing. Otherwise, you would not be able to avoid the trip to the courthouse for a determination that you are incapacitated.

Usually powers of attorney are not recorded as public information at the local courthouse. However, if the power relates to a real estate transaction, it may have to be recorded at the Recorder of Deeds Office. If a person has already reached the incapacity stage, one might want to record their power because they may no longer be competent to execute another.

Elderly people in particular may want to consider naming multiple individuals either as co or alternative agents. This would guard against the possibility that the single named agent predeceases the principal or becomes incapacitated themselves when the principal is no longer competent to name another.

Powers of attorney should be executed when you sign you sign your will. If you engage an attorney to create your estate plan he or she will include this important document. If you choose not to use an attorney, there are power of attorney forms readily available on the internet.

Medical Power of Attorney

Every basic estate plan should include a Medical Power of Attorney along with a Medical Directive to Physicians (“Living Will”). A Medical Power of Attorney is a legal document in which you (the “principal”) designate another person (the “agent”) to make health care decisions for you should you be unable to do so yourself. A Medical Power is not to be confused with a Property Power of Attorney in which you give another person the authority to make financial decisions on your behalf, another important estate planning document.

The Medical Power is a document which should be executed in addition to a Living Will. A Living Will is a document in which you direct health care providers to withhold or withdraw specified medical treatments should you be in an end stage or irreversible terminal condition. The Medical Power is more general in that it applies to more than the specified treatments and applies whether or not you are terminal.

Your Medical Power becomes effective when your physician certifies that you are incompetent to make your own medical decisions and lasts until you become competent. It applies to most decisions with the notable exception of commitment to a mental institution. With respect to the decisions made in your living will, you should specify in either or both documents whether you require your agent to follow your living will instructions or whether they are for your agent’s guidance only.

You can designate any competent adult, with the exception of your health care provider, as your medical agent. If your designated agent is either elderly or not local, you may want to designate a co-agent or alternative agent. In such a case, be sure to delineate their respective responsibilities.

Health care providers (physicians, hospitals, nursing homes, nurses and even physical therapists) will gladly provide you certainly with a Living Will and maybe a Medical Power of Attorney. These documents are also readily available on the internet. If you engage an attorney to plan your estate, he or she will also provide you with these documents.