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Estate Planning Review of 1999
ill Y2K bugs scramble computers and roil financial markets? Will apocalyptic repeals turn our transfer tax system into a pumpkin at midnight? Such ponderous questions await us in the next millennium, but before we can turn the page, let's review how we arrived at this moment and take note of the highlights of 1999.
The Ultimate Tax Reform
In Washington, the focus of attention shifted from refining the existing tax code to more profound changes. Early in the year, the President's budget for fiscal year 2000 attempted, once again, to restore the 5% surtax on estates exceeding $10 million to offset the benefits of the unified credit. The budget proposed eliminating the step-up in basis for the part of community property owned by the surviving spouse before the deceased spouse's death. Another proposal would have prevented an estate from exploiting technical flaws to keep QTIPs from being included in the estate of a surviving spouse.
By contrast, Congress proposed the ultimate transfer tax relief, i.e., the total elimination of estate, gift, and generation-skipping transfer taxes. In September, the President vetoed the Taxpayer Refund and Relief Bill of 1999 (H.R. 2488), yet by October, many of the same estate tax provisions were included in H.R. 3081.The Senate approach to transfer tax reform would have increased the unified credit to cover $1.5 million of an estate. This would have removed 75% of estates from the tax system by 2007. The Senate would also have changed the credit to an exemption and reduced the top estate and gift tax rate to 50%.
However, the Conference Committee adopted the more extensive repeal of transfer taxes that originated in the House Ways and Means Committee. First, the top estate tax rate would drop to 53% and the 5% surtax on estates over $10 million would be eliminated. Second, the 53% tax rate would be repealed. Rates would then be reduced each year for 10 years until the tax is repealed. These rates would be coordinated with the state death tax credit. Note, however, that capital gains for property transferred at death would have a carry-over basis instead of a stepped-up basis. Conservation Easements, Etc.: Another proposal would have expanded the conservation easement exclusion of Sec. 2031(c)(8)(A) by allowing land located within 50 miles of a metropolitan area, national park, or wilderness area or within 25 miles of an Urban National Forest to qualify. Other proposals address the allocation of the GST exemption, the severing of trusts, the so-called "marriage penalty," and a reduction of capital gains tax for businesses.
The Supreme Court
Elsewhere in the Capital, the Supreme Court declined to review three cases of relevance to estate planners. In Estate of Rinaldi v. U.S., CA-FC (Nov., 1998), a QTIP election was invalidated where a trust could be required to sell trust assets consisting of stock in a closely held company to the decedent's son for less than fair market value. In essence, the potential for removing value from the surviving spouse's estate violates Sec. 2056(b)(7)(B)(ii)(II).
In Estate of Mueller, CA-6 (Aug., 1998), the Court of Appeals had found that the Tax Court's jurisdiction under IRC Secs. 6214(b) and 6512(b) was too limited for it to determine a prior income tax overpayment and apply it against an estate tax deficiency.
Estate of Delaune v. U.S., CA-5, 143 F.3d 995, involved a widow who passed away before executing a disclaimer. Her heirs then fulfilled her wishes by collectively executing a renunciation on her behalf. Based on exhaustive analysis of the 1808 and 1825 versions of the Code Napoleon, the Fifth Circuit Court of Appeals found that the substance of the original French version of the law must be read into the streamlined English translations that followed. As a result, the renunciation by the heirs of an heir is indeed possible under Louisiana law. The heirs were entitled to a refund.
No Trust Merger for Valuation
One of the most potentially significant cases of the year in terms of inspiring the next generation of tax-saving trusts involved a qualified terminable interest property (QTIP) trust that included publicly traded stock. More of the same stock that was in a revocable trust was includible in the decedent's gross estate under Sec. 2033. The IRS would have merged the stock holdings and valued the majority block of 55.7% of shares at a premium. The Tax Court found that the stock in the QTIP trust was not merged with the same stock in a revocable trust for valuation purposes and permitted the estate to use a 25% marketability discount. Estate of Mellinger v. Comm'r., 112 T.C. 26.
On the same day, the Tax Court similarly found that partnership interests in a QTIP were not merged with similar interests in a revocable trust for valuation purposes. Estate of Nowell v. Comm'r., TC Memo 1999-15. Later in the year, the IRS agreed with the Tax Court. IRB 1999-35 (Aug. 30, 1999).
Following Mellinger, as well as Estate of Bonner, CA-5, 84 F.3d 196, the Tax Court applied the nonaggregation of separate trusts approach to undivided fractional interests in real estate. The estate was entitled to marketability and minority discounts. Estate of Lopes v. Comm'r., TC Memo. 1999-225.
Invasion of Trust Principal
Under what circumstances, if any, should a trust instrument authorize or direct the trustee to invade the corpus or principal of the trust? While certain trusts specify conditions and circumstances that warrant such invasion, others adopt a more flexible approach by delegating authority to an independent trustee. It is generally the case that if the trustee of an irrevocable trust is entirely independent of the grantor--such as a corporate fiduciary or a combination of family members and a corporate fiduciary--then the exercise of the trustee's sole discretion over the invasion of the corpus will not cause those assets to be included in the grantor's gross estate. However, in certain jurisdictions, state law permits creditors to reach a beneficiary's income and principal where the trustee has the discretion to invade trust assets.
In TAM 199917001, a decedent created seven irrevocable trusts in 1969. He transferred 60% of his assets to the trusts. Under the terms of the trusts, the trustees had absolute and uncontrolled discretion to distribute trust income and principal to the decedent. Because creditors could reach trust assets under applicable state law (California), the gifts were not completed under Rev. Rul. 76-103 (1976-1 CB 293) and the trusts were includible in the grantor's gross estate under Secs. 2036(a)(1) and 2038.
Appointment Powers, Trust Issues
If a lifetime beneficiary is given an unlimited testamentary power of appointment, i.e., a general power, then the assets would be included in the beneficiary's gross estate. However, variations are possible. For example, a grandchild's exercise of a contingent testamentary special power of appointment did not cause the trust assets to be included in the grandchild's estate because he could not appoint the property to himself. Letter Ruling 199918006; see also, Letter Ruling 9831005.
QPRTs: The types of assets that may be utilized with a qualified personal residence trust (QPRT) were expanded during 1999 despite the President's proposed repeal of the personal residence exception to Sec. 2702. A grantor's stock shares in a cooperative apartment qualified as a personal residence for purposes of Sec. 2702. Letter Ruling 199925027. A vacation home owned by a couple as community property and used for half of the year also qualified as a personal residence. Letter Ruling 199908032. Another vacation home qualified for QPRT treatment even though a separately rented portion of the home was used by unrelated individuals. Letter Ruling 199906014.
GST: Under Sec. 2651(e)(1), a gift from grandparent to grandchild is not considered a "direct skip" that is subject to GST tax where the grandchild's parents have predeceased the grandparents. This rule applies where a grandchild, whose parents were deceased, was adopted by his aunt, i.e., a sibling of his deceased mother and a member of the intervening or potentially skipped generation. Letter Ruling 199907015.
CRUTS: Charitable split-dollar insurance trusts were scrutinized by the IRS. These arrangements vary, but typically involve (1) the transfer of assets to an irrevocable trust, (2) the use of transferred assets to pay for the premiums on life insurance, and (3) the distribution of the insurance proceeds to both the charity and the grantor's family. In Notice 99-36, IRB 1999-26, (June 28, 1999), the IRS warned that this type of arrangement will not result in charitable deductions and may, in fact, subject the participants to penalties. The IRS also extended the deadline for special reformations of charitable remainder unitrusts (CRUTs) as provided in Reg. 1.664-3(a)(1)(i)(f)(3). Legal proceedings for CRUT reformations must be commenced by June 30, 2000, while non-judicial proceedings must be completed by that date. Notice 99-31, IRB 1999-23 (June 7, 1999).
Enforcing Charitable Pledges
In the past, we have reported on an unusual lawsuit brought by an art museum against donors who reneged on a pledge. In 1990, Armand Hammer pledged $50,000 to a political organization which then made a claim against Hammer's estate. The pledge was honored seven years after Hammer's death. Another situation involves Buffalo Bob Smith who returned his longtime companion, Howdy Doody, to the man who created him, Rufus Rose. This contradicted pledges to donate Howdy Doody to the Detroit Institute of the Arts.
Adding another dimension to this discussion is a situation involving the Whitney Museum in New York. This museum has a large collection of Calder mobiles. A special work had been commissioned in 1943 by the renowned architect Philip Johnson and his sister, Mrs. Severn. However, because Mrs. Severn, now 91, is in ailing health and has limited funds, the museum has not attempted to force the gift of the Calder mobile. Instead, the museum allowed the mobile to be auctioned, where it was purchased for $1.9 million.
Art Estates
The estate of artist Mark Rothko involved 12 years of litigation that resulted in the removal of executors and sanctions against the Marlborough Gallery. (See The Estate Analyst of July, 1999, p. 4.) This year, based on administrative "anomalies," England's High Court has ended the association of European branches of Marlborough with the estate of Francis Bacon, who died in 1992 and is considered the greatest British painter of his generation. Meanwhile, Andy Warhol's estate, once estimated to be worth between $100 million and $800 million, now has $40 million in cash and $81 million in art. The estate was dissipated on legal fees during a dispute that reduced the fee to the estate's attorney from $12 million to $3.5 million. Last year, the Warhol Foundation made $9.5 million of grants but had $5.3 million of administrative expenses, prompting New York's Attorney General to impose strict financial controls.
Wriggling Free of Claims
How much of the Wrigley chewing gum fortune of $2.7 billion would go to the founder's great-grandchildren and how much to the estranged wife of the founder's son? Under Wisconsin law, the 50-50 sharing rule for community property does not apply to property held in trust. Of $1.86 billion of divisible marital assets, $1.55 billion was held in generation-skipping trusts. In 1981, William Wrigley reportedly sold the Chicago Cubs to pay inheritance tax on his parents' estates. In light of this experience, family trusts were designed to transfer control of the company free of tax.
Da Vinci's Horse
Leonardo da Vinci's plans for the world's largest equestrian statue, a 24-foot-tall bronze horse to honor his patron, the Duke of Milan, were dashed when invading French troops destroyed a lifesize clay model. He cried on his deathbed at the loss. Flash forward about 500 years. It is 1965 and a drawing of da Vinci's horse the size of a postage stamp is discovered in Madrid. In 1978, pilot and amateur sculptor Charles Dent read an article about da Vinci's unfinished project in National Geographic. Though he did not live to see his dream become a reality in 1999, Mr. Dent's will established a foundation to continue funding the $6-million project to produce a 15-ton bronze stallion. Smaller eight-foot versions will be sold at $380,000 apiece to fund Renaissance studies and art projects.
Our Brightest Star
"John was a shining light in all our lives, and in the lives of the nation and the world that first came to know him when he was a little boy." --Senator Ted Kennedy. John F. Kennedy, Jr.'s will bequeathed personal items to his sister's children. Assets of $30-$100 million were placed in a trust for relatives, friends, employees, and charities.
Trusts & Estates in Brief
Busy World
No time to spell things out? Noting that the use of initials is not desirable, the Supreme Court of Mississippi nevertheless accepted JTWROS on a securities account to mean "joint tenancy with rights of survivorship," causing the property to pass outside of probate and directly to a spouse. Estate v. Baker, 1998-CA-01164-SCT.
Seize That Schiele
Hours after New York's Court of Appeals ruled that art is protected from seizure under state law in all cases, whether civil or criminal, the U.S. Attorney's office seized "Portrait of Wally," an allegedly stolen Schiele painting which was on loan to the Museum of Modern Art.
Football Estates
The estate of Jack Kent Cooke received $800 million for the Washington Redskins. That's the most ever paid for an American sports franchise. Meanwhile, perhaps having seen enough families fight over, and disrupt, inherited sports franchises, the will of New York Jets owner Leon Hess bars his family from participating in the team's future and imposes an in terrorem clause to reduce by 25% the share of any beneficiary who challenges the sale of the team.
Biggest Estates
Forbes' 13th annual billionaires list now includes 465 members. Leading the pack, and passing the $100 billion mark, was William H. Gates of Microsoft. New members include Martha Stewart, whose company went public in October.
Celebrity Estates
A woman claiming a 29-year relationship with Charles Kuralt asserts that a 1989 will, and a deathbed letter, entitles her to 110 acres of land. A fan of Charles Bronson left a handwritten will/grocery list that excluded family members and left her $292,000 estate to the actor. Mr. Bronson reached a settlement with the fan's sister. Cher made news by filing a claim for unpaid alimony against ex-husband Sonny Bono's $1.6 million estate. A previously unknown son of the late Congressman is attempting to prove paternity using DNA. For the text of celebrity wills, see the website of wills maven Herbert Nass: www.wills-ofrichandfamous.com.
Marcos Estate
Heirs of Ferdinand Marcos agreed to a $150-million settlement with 9,539 torture victims who brought a class-action suit against the estate. Meanwhile, a Picasso from the Marcos collection that disappeared from the Philippines consulate in 1986 was sold at Christie's for $992,500--three parties have laid claim to the proceeds.
Chutzpah '99
The insurer of a grain truck sought $2,800 from the estate of an 81-year-old, 105-pound woman who allegedly damaged the grain truck when it ran over her. The woman was allegedly negligent for leaving her car after a tire blew out.
Best Understatement
"I hope I haven't opened up a can of worms," said Clayton Goward, 79, after he placed an ad in his local newspaper to find an heir for his $375,000 estate. "My estate is sizable and I have no worthy heirs," read the ad.
House of Lords
"Am proactive self-starter with good working knowledge of estate management, horsemanship, dithering, dribbling and claret drinking. Have experiences in the intricacies of the tax system - specifically, in relation to inheritance tax loopholes - and seller's knowledge of the art market." -- A model 75-word essay offered by columnist Giles Coren of The Times to hereditary members of the British House of Lords who must submit such essays to retain their seats.
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